Work

Asymmetric cost behavior and financial distress

Year: 2024

Type: article

Abstract: In this study, we investigate the effect of asymmetric cost behavior (ACB) on financial distress. In ACB, managers’ deliberate decision to retain idle resources creates an inflexible cost structure, which leads to financial distress. Using a sample of 107,021 firm-year observations from 12,850 U.S. listed non-financial firms over the period from 1987 to 2020, our findings reveal a positive relationship between ACB and financial distress. This relationship is driven by managerial optimism and overconfidence, as theorized in behavioral finance and the management optimism hypothesis. These results contribute to the growing understanding of how cognitive biases impact corporate financial decisions, particularly in firms facing financial distress, and underscore the importance of effective cost management in reducing the risks associated with ACB.

Source: Economics Letters

DOI: 10.1016/j.econlet.2024.112121

Authors: Agha Mureed Ahemed, Umer Iqbal, Mian Muhammad Atif

Institutions: National University of Computer and Emerging Sciences, Northumbria University

Language: English

Topic: Financial Distress and Bankruptcy Prediction

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $2,980

OpenAlex ID: W4405212392

FWCI: 10.06

Cites: 26

Cited by: 10

Related to: 10