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Selling durables: Financial flexibility for limited cost pass-through

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  • Lee, Kyeong Hun
  • Mauer, David C.
  • Xu, Emma Q.

Abstract

We test whether limited cost pass-through encourages durable goods producers to build financial flexibility. We find that firms with more durable output have larger cash balances and marginal value of cash, lower propensity to pay dividends, and less financial leverage. The link between durable goods and financial flexibility is equally strong in low and zero leverage firms and is reduced in more concentrated industries and when the firm has captive financing activity. Consistent with high demand elasticity driving limited cost pass-through, we find that a large increase in input costs decreases markups and financial slack of durable goods firms in comparison to nondurable goods and services firms.

Suggested Citation

  • Lee, Kyeong Hun & Mauer, David C. & Xu, Emma Q., 2022. "Selling durables: Financial flexibility for limited cost pass-through," Journal of Corporate Finance, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:corfin:v:75:y:2022:i:c:s0929119922000712
    DOI: 10.1016/j.jcorpfin.2022.102228
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    More about this item

    Keywords

    Durable goods; Cost pass-through; Financial flexibility;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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