Rigid Cost Structures as a Preemptive Strategy

We examine whether cost structure influences tax-motivated income shifting. We predict and find that U.S. multinational corporations (MNCs) with a less rigid cost structure engage in greater levels of tax-motivated income shifting relative to MNCs with a more rigid cost structure. This result is consistent with a less rigid cost structure providing greater flexibility to enable MNCs to take advantage of income-shifting opportunities. Further, we find that this relation is more pronounced when firms face greater costs in adjusting their operations, have less transfer pricing flexibility, and operate in a more uncertain environment. These results suggest that firms with less rigid cost structures possess the strategic operating and accounting flexibility necessary to take advantage of income-shifting opportunities. We provide evidence suggesting that a firm’s cost structure, a fundamental attribute of a firm’s business model, is a distinct and incrementally important determinant of tax-motivated income shifting. Data Availability: All data used in this study are publicly available. JEL Classifications: G32; H26; M41.

Purpose This study aims to examine the relationship between managers’ political risk disclosure and their cost structure choice, measured with the level of cost rigidity and the impact of CEO overconfidence. Design/methodology/approach Using a sample of 1,626 US firms during 2003–2019, this study uses a multivariate regression analysis and a log-linear cost structure model based on prior studies (e.g. Anderson et al., 2003; Banker et al., 2014; Kallapur and Eldenburg, 2005; Noreen and Soderstrom, 1994, 1997). Findings This study finds a positive association between firm-level political disclosure and cost rigidity, suggesting that disclosure provides a signal for managers’ risk awareness and optimistic outlook about future sales. It also finds overconfident CEOs are more likely to choose a more rigid cost structure than nonoverconfident CEOs. However, it finds that firms with overconfident CEOs who provide more political risk disclosure and choose a more rigid cost structure are associated with lower performance, suggesting that overconfidence is associated with suboptimal decisions. Research limitations/implications This study suggests that political risk disclosure signals information about managers’ risk awareness and optimism about future demands. It has an important implication for investors’ decision-making and business valuation as managers’ political risk disclosure signals their ex ante choices of firms’ cost structure. Using a new research setting (i.e. political risk disclosure and cost rigidity), this study shows that CEO overconfidence leads to suboptimal investment decisions, contributing to the stream of research examining the impact of CEO overconfidence on management decision-making and firm performance. Originality/value This study extends the literature on voluntary risk-related disclosure by showing the association between political risk disclosure and cost structure decisions. It contributes to the literature by providing evidence that CEO overconfidence plays an important role in the cost structure decisions, resulting in a suboptimal firm performance.

This article explores how climate change exposure affects the firms' cost structures. We use Sautner et al.'s (2023) measure of firm‐level climate change exposure based on earnings conference calls of publicly‐listed U.S. companies from 2002 to 2020 to capture both the opportunities and threats brought about by climate change and understand the comprehensive impact of climate change on the firms' cost structure decisions. Prior literature has documented that firms strategically alter their cost structure when demand is uncertain and firms are concerned about unusually high or low demand realizations. We build on this prior literature and find that firms exposed to climate change adopt a more rigid cost structure with a higher proportion of fixed costs. Our findings suggest that firms perceive higher congestion costs from unusually high demand realizations caused by long‐term climate change. We find that the effect of climate change exposure on cost rigidity is more pronounced for firms with more positive demand expectations and firms in more competitive product markets. Lastly, we find that investors react positively to the rigid cost structure of firms exposed to climate change. Overall, this article sheds light on the real effects of climate change on the firms' operational decisions.

Cost rigidity defines the characteristics of cost structure which is defined as the proportion of fixed costs to variable costs of firms. When the proportion of fixed costs are higher than the variable costs, then the cost structure is defined as a rigid cost structure. The structure of operating costs of Turkish manufacturing firms between years 1995 and 2014 is tested in terms of their “rigidity” in this paper. Moreover, the effect of demand uncertainty, as measured by the standard deviation of net sales, on the cost structure of operating costs is also tested. Findings support that higher levels of demand uncertainty are associated with higher portions of fixed costs in the cost structure (i.e., more rigid cost structure). That result contradicts the common wisdom that firms tend to lower the fixed costs in their cost structure as they are confronted with uncertainty.

PurposeThis paper aims to investigate if the world top manufacturing corporations' cost structures are moving from tangible to intangible activities and their impact on profitability.Design/methodology/approachThe theoretical approach is interdisciplinary, combining global value chains, international manufacturing networks, cost management literatures. The empirical approach has a sample out of financial statements' data from 220 multinational corporations between 2006 and 2017, grouping them by technological intensity. It is created the “COGS-share” indicator – the ratio between the costs of goods sold and overall costs and expenses – as a proxy for the firms' expenses of tangible and intangible value chain activities. It is tested as an explanatory variable for the companies' profits through dynamic panel data econometric models.FindingsThe results show that the cost structure still is very concentrated in tangibles. Though costs of both tangible and intangible activities negatively impact profits, they affect value generation differently: the higher the share of intangible in comparison to tangible activities in overall cost and expenses, the greater the profits in most manufacturing groups, regardless of their technological intensity.Research limitations/implicationsThe empirical analysis simplifies the composition of value chains per activity because financial statements data are aggregates, preventing detailed analysis by markets, business units or products. Stocks' levels are assumed to be at the desired level during the time series. The dataset does not allow value curves to be drawn because direct wages' data and more precise information on cost (especially deferred assets and wages) are missing.Practical implicationsThe presented approach, particularly the COGS-share indicator, contribute to assess value generation from activities for improving corporate strategies and public policies on operations and cost management of global value chains.Social implicationsSupporting upgrading decisions that impact value production, allocation and distribution between workers, firms and countries.Originality/valueInterdisciplinary theoretical and empirical assessment of the manufacturing companies' cost structures and profits based on financial statements data for the better understanding of value generation from tangible and intangible activities.

Building on Banker, Byzalov, and Plehn‐Dujowich's (2014, The Accounting Review, 89(3), 839–865) 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.

We examine whether skilled nursing facilities' (SNFs') cost structures vary based on their Medicaid payment systems: fixed-price (FXP) or cost-plus (C+). FXP systems—which tie payments to patient conditions, rather than costs—increase SNFs' operating risk by decreasing the association between revenues and costs. Results suggest that cost elasticities are greater in SNFs that operate primarily under FXP, with weaker results in non-profit SNFs compared with for-profit SNFs. We conclude that SNFs' cost structures are managed in part based on the operating risk resulting from their payment systems. We also find that, under FXP, managers of for-profit SNFs introduce more variable costs into their cost structures by deploying more contract labor. Finally, we show that greater use of contract labor by for-profit SNFs in FXP settings is concentrated below the registered nurse skill level. For non-profit SNFs, we find no differences in contract labor across payment types. Data Availability: All data are publicly available from sources indicated in the text.

We examine the association between monopsony power and hospital cost structure using data from more than 2,000 U.S. hospitals. Monopsony characterizes a market with a single buyer and many suppliers. Accordingly, monopsony power is a potentially critical determinant of cost structure because it affects managers’ resource procurement decisions. Results indicate that hospitals with monopsony power adopt more elastic cost structures, and monopsony power magnifies the positive relationship between demand uncertainty and cost elasticity identified in prior research. These findings suggest monopsony power lowers the costs of procuring resources on flexible, short-term, and variable bases as opposed to making long-term commitments. Therefore, due to the high fixed-cost nature of the industry, hospitals with monopsony power choose more variable cost structures and make larger cost structure adjustments in response to demand uncertainty. Although we conduct this research using hospitals, our theory and results have implications for other industries. Data Availability: Data are publicly available from the sources cited in this study. JEL Classifications: D22; D23; I11; M20; M40.

In this study, we examine the joint effects on cost structure of two major sources of supply chain risks: the internal firm-level bullwhip effect and external demand uncertainty. The firm-level bullwhip effect is a phenomenon in which fluctuations in production (for manufacturing firms) or purchases from suppliers (for retailers or wholesalers) in a firm tend to be greater than its demand fluctuations. While prior accounting literature focuses on the impact of external demand uncertainty on cost structure, the internal bullwhip effect in firms plays a critical role because the bullwhip effect determines the extent to which the impact of external demand uncertainty is transmitted within the firm. Using data from 7,179 public U.S. firms over the 1990–2019 period, we show that the firm-level bullwhip effect amplifies the impact of demand uncertainty on cost structure. Specifically, regardless of whether demand uncertainty leads to a more rigid or elastic cost structure in a particular setting, we find that such effect is more pronounced in firms with a higher bullwhip ratio than in firms with a lower bullwhip ratio. Drawing on both management accounting and supply chain management literatures, our study highlights the interactive effect of the firm-level bullwhip effect and demand uncertainty on firms’ cost structure decisions.

In this study, we draw on economic theories of cost structure and the effects of international trade on firms' productivity to assess firm‐level cost behavior in the context of globalization. We investigate why and how trade openness affects firms' cost structure by examining the changes of fixed inputs along with those in capacity levels. Using a sample consisting of 25 countries from 2000 to 2014, we find that trade openness does significantly affect firms fixed and variable cost inputs, which indicate that production uncertainty along with international trade is essential to the cost structure decision in terms of cost rigidity. Furthermore, larger firms are more likely to adopt a rigid cost structure with higher fixed costs and lower variable costs because they are more involved in the international economy and more exposed to associated uncertainties.

Reporting transparency and completeness in trials: Paper 1: Introduction - Better reporting for disruptive clinical trials using routinely collected data

Prior literature shows that how creditors monitor borrowers and exercise control rights affect borrowers’ investment and financial policies, but little is known about their impact on borrowers’ operating decisions. The availability of a credit default swap (CDS) reduces creditors’ monitoring incentives ex ante but increases their liquidation incentives in the events of default ex post. After the inception of CDS trading, reference firms exhibit an increase in the elasticity of cost structure. Results are consistent in instrumental variable analyses and are robust with alternative matching samples. The increase in cost structure elasticity is more pronounced for firms with greater credit risk and more restrictive covenants and financially constrained firms, and those face greater product market competition and provide higher convexity in managers’ compensation. We provide the first evidence showing that managers choose a more elastic cost structure when creditors become less forgiving. Data Availability: All the data used in this paper are from publicly available databases. JEL Classifications: D24; G32; M41.

This study investigates the impact of firms’ strategic positioning on cost structure. Using textual analysis based on 10-K filings, we capture business strategy along three dimensions: product leadership, customer intimacy, and operational excellence. Firms pursuing the product leadership strategy emphasize innovation and confront high congestion risk caused by rapid growth. We find that these firms display a more rigid cost structure by incurring higher strategic fixed investments in R&D and choosing higher committed capacity to reduce congestion risk. We also document that firms following the other two strategies on average exhibit a less rigid cost structure. This is possibly because customer-intimate firms tend to invest in specialized resources in small chunks and take on-demand inputs to tailor offerings, while operational-excellence firms may adopt real options and flexible models to achieve production efficiency and mitigate default risk. Our results are robust to using a difference-in-difference approach based on a quasinatural shock caused by the Inevitable Disclosure Doctrine adoption and a change analysis based on firms’ internal strategic shifts. Our findings suggest that organizational strategy has a significant impact on firms’ resource commitments and capacity choices.

We examine how suppliers' product market competition influences the relation between customer concentration and cost structure. Analyzing cost data from a sample of manufacturing firms, we find that suppliers exhibit more rigid cost structure when both product market competition and customer concentration are high. In further analysis, we find that the effect of competition on the relationship between customer concentration and cost structure is isolated to the COGS and COGM. Our results suggest that suppliers trade off the downside risk of having fixed costs that cannot be reassigned with the potential upside benefit of meeting major customer demands. JEL Classifications: M41; L25.

Credit risk assessments are vital to the operations of financial institutions. These activities depend on the availability of data. In many cases, the records of financial data processed by the credit risk models are frequently incomplete. Several methods have been proposed in the literature to address the problem of missing values. Yet, when assessing a company, there are some critical features that influence the final credit assessment. The availability of financial data also depends strongly on the country to which the company belongs. This is due to the fact there are countries where the regulatory frameworks allow companies to not publish their financial statements. In this paper, we propose a framework that can process historical credit assessments of a large number of companies, which were performed between 2008 and 2019, in order to treat the data as time series. We then used these time series data in order to fit two different models: a traditional statistics model (an autoregressive moving average model) and a machine-learning based model (a gradient boosting model). This approach allowed the generation of future credit assessments without the need for new financial data.