Stock Price Crash Risk and Firms’ Operating Leverage

Chang, Xin; Cheng, Louis T. W.; Kwok, Wing Chun; Wong, George

doi:10.2139/ssrn.4217241

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2024

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“…Since fixed and variable costs are not observable, we operationalize cost structure using the slope in a regression of log-changes in costs on contemporaneous logchanges in sales (BBP; X. Chang et al, 2022).…”

Section: Introductionmentioning

confidence: 99%

Demand uncertainty, inventory, and cost structure

Chang,

Kwok,

Wong

2024

Contemporary Accting Res

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Building on Banker, Byzalov, and Plehn‐Dujowich's (2014) congestion cost theory, we model firms' trade‐off between a rigid cost structure and a high inventory level to reduce the congestion costs caused by uncertain demand. We demonstrate that firms with a higher inventory level adopt a less rigid cost structure, but the effect of cost structure on inventory is theoretically ambiguous. Using a large sample of manufacturing firms in the United States, we empirically investigate the dynamic interdependence between cost structure and inventory choices. Our results reveal that cost structure rigidity and inventory are negatively associated with each other over time, suggesting that they serve as substitutes in tackling demand uncertainty. Further analysis demonstrates that firms favor higher inventory levels over more rigid costs when inventory‐carrying costs decrease, fixed input costs increase, or downside risk escalates.This article is protected by copyright. All rights reserved.

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Section: Introductionmentioning

confidence: 99%