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Mar 11

Essays on Cost Structure

Location:

Gerri C. LeBow Hall
939
3220 Market Street
Philadelphia, PA 19104

This dissertation consists of two essays related to cost structure. The first essay examines the impact of declining profitability on managers’ cost structure decisions. Cost structure decisions have significant implications for firm operating risk, with more elastic cost structures increasing earnings volatility. Behavioral theories predict that managers are likely to exhibit shifts in their risk preferences in response to declining profitability. Analyzing cost data from a sample of manufacturing firms from the years 1976 through 2013, I find that managers facing declining profitability adopt less elastic cost structures associated with higher levels of operating risk. I also examine several environmental factors which potentially amplify cost structure-related earnings volatility. I find that these environmental factors lead to lower, rather than higher, levels of cost elasticity. These results suggest that managers take on additional operating risk through their cost structure decisions even under environmental conditions where such risks may lead to potentially large future losses.

The second essay examines the effects of customer concentration levels on firm cost structure decisions. Analyzing cost data from a sample of manufacturing firms for the years 1976 through 2013, we find a negative relationship between customer concentration and cost elasticity whereby firms exhibit lower proportions of variable-to-fixed costs in the presence of higher levels of customer concentration. Additionally, we find that greater customer bargaining power, proxied by supplier industry competition and product market fluidity, leads to lower cost elasticity as customer concentration becomes greater. These results are robust to alternate specifications of customer concentration and the inclusion of additional control variables. Our results suggest that suppliers respond to customer concentration by pursuing increased mutual dependence and cooperation with customers rather than attempting to reduce power imbalances within the supplier-customer relationship. These essays contribute to the accounting literature by providing insight into the various factors which influence firm cost structure decisions.

Many thanks to: Supervising Professors: Hsihui Chang and Christopher D. Ittner (Co-Chair) Committee Members: Anthony P. Curatola Mark E. Vargus Johnny “Jiung-Yee” Lee Hiu Lam Choy

PhD Candidate