Asymmetric Cost Behavior and Non-Financial Firms' Risky Financial Investments

Abstract

Using a hand-collected sample of non-financial firms’ financial portfolios, I examine how asymmetric cost behavior (or cost stickiness) affects risky financial investments. Sticky costs amplify the downward effect of sales decrease on profits because costs do not fall when sales decrease by as much as they rise when sales increase. I find that firms with sticky costs reduce risky financial investments because of expected liquidity needs and the trade-off between operating and financial risk. Oster’s delta, difference-in-differences analysis, and synthetic control method address endogeneity concerns. For non-financial firms with sticky costs, investing in risky securities subdues non-financial investments and increases a firm’s risk exposure without creating shareholder value.