Access to finance and cost stickiness: Evidence from anti-recharacterization laws

Tongxia Li, Chun Lu and Lei Xu

Advances in accounting, 2025, vol. 68, issue C

Abstract: This paper examines the impact of financial constraints on asymmetric cost behavior (i.e., cost stickiness). Specifically, we use a natural experiment — the staggered introduction of the anti-recharacterization laws (ARLs) — to investigate the causal relationship between financial constraints and cost stickiness. Implementing anti-recharacterization state regulation increases the value of a firm's collateral, resulting in lower external financing costs and improved credit market access. We hypothesize that this improves firms' ability to obtain external funding for expansion and allows firms facing sales decreases to retain their resources for a potential rebound. This results in an increase in cost stickiness. Our findings support the hypothesis that cost stickiness increases after the passage of the ARLs. Moreover, the effect of these laws is more pronounced for high-growth firms, firms with more stringent financial constraints, and firms relying on external financing, especially financing through special purpose vehicles (SPVs). These changes in asymmetric cost behavior are driven by economic incentives that improve firm performance.

Keywords: Anti-recharacterization laws; Creditor rights; Operating costs; Cost stickiness; Adjustment cost (search for similar items in EconPapers)
JEL-codes: D24 G28 G32 K22 M41 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:advacc:v:68:y:2025:i:c:s0882611025000112

DOI: 10.1016/j.adiac.2025.100816

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