Cost asymmetry and firm value

Abstract

In this paper we explore the association between asymmetric cost behavior and firm value. Using a large sample of U.S. data, we find a robust negative relationship between cost asymmetry and firm value. We then explore whether the resource adjustment, managerial expectations, and agency theories of asymmetric cost behaviour affect the negative relation, and find support for the managerial expectation and agency theories. Furthermore, we find evidence that the detrimental impact of asymmetric cost behaviour on firm value is mediated partially through the cost of equity and cash flow channels. Further investigation suggests that the detrimental impact of cost asymmetry on firm value is stronger in the presence of high information asymmetry. We enrich the cost management literature by integrating cost asymmetry with corporate finance.