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The business cycle and cost structure’s adjustment speed

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  • Zhu, Bo
  • Yuan, Menglin

Abstract

Using a large sample of Chinese listed firms from 2009 to 2019, we investigate whether firms have a target cost structure and how the business cycle (BC) impacts the cost structure’s adjustment speed. The results show that firms have a target cost structure and adjust dynamically with external macroeconomic conditions. The adjustment speed of a firm’s cost structure exhibits a pro-cyclical effect that firms move faster toward optimal cost structure levels in a boom than in a recession. We find that the positive relationship between BCs and the cost structure’s adjustment speed is more significant for non-state-owned enterprises and firms in cyclical industries. In addition, the degree of financing constraints is an important channel through which the BC affects the adjustment speed. This paper provides compelling evidence for firms’ target cost structures and sheds light on the dynamic adjustment of cost structures.

Suggested Citation

  • Zhu, Bo & Yuan, Menglin, 2022. "The business cycle and cost structure’s adjustment speed," Research in International Business and Finance, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:riibaf:v:62:y:2022:i:c:s0275531922001192
    DOI: 10.1016/j.ribaf.2022.101731
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    1. Zhu, Bo & Chen, Yuguo & Cheng, Jia-Chi, 2023. "Business cycle and cost structure," International Review of Financial Analysis, Elsevier, vol. 89(C).

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