Asymmetric cost behavior and financial distress

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.