Business cycle and cost structure

Bo Zhu, Yuguo Chen and Jia-Chi Cheng

International Review of Financial Analysis, 2023, vol. 89, issue C

Abstract: This paper examines whether and how the business cycle affects a firm's cost structure decisions. Using annual data from a large sample of Chinese manufacturing firms over the period of 1998–2018, we find that firms choose a more elastic cost structure with higher variable and lower fixed costs, in recession than in boom periods. We also find that the positive association between recession and cost elasticity is more pronounced in firms in cyclical industries. Further, our mediating effects analysis suggests that managers' expectations regarding future sales and a firm's resource availability are two specific channels by which the business cycles affect a firm's cost structure. Our results also hold after a battery of robustness checks.

Keywords: Business cycle; Cost structure; Cyclical industries; Managerial expectations; Resource availability (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:89:y:2023:i:c:s1057521923003411

DOI: 10.1016/j.irfa.2023.102825

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