The Moderating Effect of the Main Bank System in Japan on the Association between Financial Risk and Cost Behavior
39 Pages Posted: 17 Aug 2016
Date Written: August 14, 2016
Abstract
This study examines the relationship between financial risk and cost behavior both theoretically and empirically. We suggest that financial risk will affect the degree of discretion of managerial resource adjustment decisions by its impacts on financial flexibility and the cost of capital. As expected, our results show that financial risk increases the degree of cost anti-stickiness in the case of a prior activity decrease. On the other hand, financial risk appears to have no statistically significant influence on cost behavior in the case of a prior activity increase. This result is not consistent with our prediction. This study also examines the moderating effect of the close relationships between firms and banks on the association between financial risk and asymmetric cost behavior by using the data of the main bank system in Japan. The results of the study show that the close ties with main banks will mitigate the adverse impacts of financial risk and enlarge the degree of managerial discretion in adjusting resources in firms with high financial risk.
Keywords: Cost Stickiness, Cost Behavior, Financial Risk, Main Bank System
JEL Classification: M41, D24, D81, G32, G33
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