Dividend regulation and cost stickiness: evidence from a quasi-natural experiment

Abstract

PurposeThis paper aims to examine the effect of dividend regulation on cost stickiness (i.e. the asymmetric change in firm expense between sales increase and sales decrease) and explore the underlying mechanism.Design/methodology/approachBased on the quasi-natural experiment of the Guideline for Dividend Policy of Listed Companies issued by the Shanghai Stock Exchange (SSE) in 2013, the authors employ a difference-in-difference model to investigate the impact of dividend regulation on cost stickiness.FindingsThe authors find that the cost stickiness of treatment group firms has decreased significantly when compared with control group firms after the dividend regulation. Moreover, this effect is more pronounced among firms in lower marketization regions, in lower competition industries and those with less analyst coverage and lower cash flow levels. Further analyses show that dividend regulation reduces the cost stickiness of firms by mitigating agency problems. Finally, the conclusion holds after several robust tests, including controlling for firm fixed effect, propensity score matching (PSM), placebo test and reconstruction of expense variable.Originality/valueThis paper confirms that dividend regulation serves an important role in corporate governance, which reduces firms' agency costs and thereby decreases cost stickiness. The conclusions shed light on the dividend policies of listed companies and capital market regulation in the future.

Quality of audit and cost stickiness empirical evidence from emerging markets

“…Compared with the traditional model of cost behavior that describes the linear relationship between cost levels and activity volume, Cost Stickiness (CS) is better with the decisions of management related to resource adjustment in practical practices. The presence of cost stickiness is strongly related to the behavior of managers' practice (Anderson et al, 2003;Chen et al, 2012;Xue & Hong, 2016;Chen et al, 2022). The traditional model of cost behavior assumes a direct relationship between the levels of costs and the magnitude of activity (costs fixed or variable), and these costs are driven mainly by the cost driver levels.…”

“…These cases show that managers seek to achieve or maximize their special benefits at the expense of stockholders by practicing moral hazard actions (Anderson et al, 2003;Dierynck et al, 2012;Chen et al, 2012). Previous studies recommend that scholars should do efforts in understanding and examining cost behavior's determinants in view of managers' incentives, particularly incentives driven by the agency that influence the decisions of resources adjustment (e.g., Kama & Weiss;Bugeja et al, 2015;Ibrahim, 2018;Chen et al, 2022).…”