Does Debt Intensity Have an Impact on Cost Behavior? Evidence from Japan

Abstract

According to earlier studies, debt intensity affects cost behavior because managers have an obligation to pay interest. However, debt intensity entails additional effects on cost behavior because managers must pay the debt even if they manipulate costs to avoid bankruptcy. Given this perspective, paying long-term debt is not as urgent as discharging current liabilities. Therefore, long-term debt and current liabilities are expected to have different effects on asymmetric cost behavior through managers’ repayment decision-making. We examine this issue using data for Japan, which shows that current liabilities have a greater effect on selling, general, and administrative expense (SG&A) cost behavior than long-term debt and total debt do. Because current liabilities induce managers to pay the debt quickly, they manage cash by manipulating costs. A drastic decrease in the manipulated cost will result in an anti-sticky cost. Recognizing the effects of current liabilities on anti-stickiness is important. Our results suggest that the debt type is important when analyzing cost stickiness.