Business cycle and cost structure |
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| Institution: | 1. School of Economics and Management, Southwest Jiaotong University, Chengdu, China;2. College of Management, Yuan Ze University, Taoyuan, Taiwan;1. School of Accountancy, Shanghai University of Finance and Economics, China;2. Department of Finance, Huazhong University of Science and Technology, 1037 Louyu Road, Wuhan 430074, China;3. Department of Accounting, School of Management, Jinan University, China;1. James Cook University, Queensland, Australia;2. Western Sydney University, NSW, Australia;3. Lebanese American University, Beirut, Lebanon;1. Worcester Polytechnic Institute, 100 Institute Rd, Worcester, MA 01609, United States of America;2. Broadwell College of Business and Economics, Fayetteville State University, Fayetteville, NC 28301., United States of America;1. School of Economics and Management, Southwest Jiaotong University, Chengdu, China;2. Service Science and Innovation Key Laboratory of Sichuan Province;1. School of Economics and Management, Southwest Jiaotong University, Chengdu, China;2. Service Science and Innovation Key Laboratory of Sichuan Province, China |
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| Abstract: | This paper examines whether and how the business cycle affects a firm's cost structure decisions. Using annual data from a large sample of Chinese manufacturing firms over the period of 1998–2018, we find that firms choose a more elastic cost structure with higher variable and lower fixed costs, in recession than in boom periods. We also find that the positive association between recession and cost elasticity is more pronounced in firms in cyclical industries. Further, our mediating effects analysis suggests that managers' expectations regarding future sales and a firm's resource availability are two specific channels by which the business cycles affect a firm's cost structure. Our results also hold after a battery of robustness checks. |
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