Financial Risk, Main Bank System, and Cost Behavior: Empirical Evidence from Japan

Mami Koyama, Tomohisa Kitada and Takehisa Kajiwara
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Mami Koyama: Graduate School of Business Administration, Kobe University
Tomohisa Kitada: Graduate School of Business Administration, Kobe University
Takehisa Kajiwara: Graduate School of Business Administration, Kobe University

No 2016-14, Discussion Papers from Kobe University, Graduate School of Business Administration

Abstract: We examine the relationship between financial risk and cost behavior, both theoretically and empirically. We suggest that financial risk will affect the degree of discretion in managerial resource adjustment decisions by its impacts on financial flexibility. 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. We also examine the moderating effect of the close relationships between firms and banks on the association between financial risk and asymmetric cost behavior using data on the main bank system in Japan. Consistent with our prediction, our results show that firms’ close ties with the main banks mitigate the adverse impacts of financial risk and allow managers to adjust resources flexibly in response to sales changes, even if the firms face high financial risk.

Keywords: Cost Stickiness; Cost Behavior; Financial Risk; Main Bank System (search for similar items in EconPapers)
JEL-codes: D24 D81 G32 G33 M41 (search for similar items in EconPapers)
Date: 2016-12
New Economics Papers: this item is included in nep-ban and nep-cfn
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