Cost management and working capital management: ebony and ivory in perfect harmony?

Abstract

The aim of this paper is to empirically investigate the potential association between a firm’s cost behavior, characterized as cost stickiness or anti-stickiness, and working capital management (WCM), as measured by the working capital to total assets ratio and the trade cycle measures net trade cycle and cash conversion cycle. We measure cost stickiness using four widely accepted models and a sample of non-financial firms sourced from Compustat. Our findings highlight the significant influence of WCM on cost behavior. Specifically, we observe an inverse relationship between a firm’s WCM aggressiveness and both its cost stickiness and degree of cost adjustment. These relationships are consistent for both operating costs and the costs of goods sold.