Financial constraints and asymmetric cost behavior.

This study investigates the association between financial constraints and cost asymmetry. Using a large U.S. sample of firms from 1976 to 2016, we find that financially constrained firms exhibit less cost asymmetry. However, such low cost asymmetry is more pronounced for SG&A cost category compared to operating cost category. Our results remain generally consistent across various specifications of financial constraints measures and various asymmetric cost behavior measures. We explore three contextual settings that might affect the association differentially, namely, the future value-creating potential of SG&A expense setting, the investment opportunities setting, and the earnings management setting. In addition, we find evidence that financial constraint leads to lower cost asymmetry, even when managers have received optimistic signals about future sales. As resources drive the costs of a business, and financial constraints affect resource availability, studying the cost behavior of constrained firms makes a valuable contribution to the existing cost asymmetry literature. [ABSTRACT FROM AUTHOR]