Essays on cost management

Michael Thomas Paz

doi:10.17918/etd-7212

This dissertation consists of two essays studying cost management within firms. The first essay examines the impact of declining firm performance on managers' investment decisions. Investment decisions have significant implications for firm operating risk in that they represent expenditures of firm capital with uncertain future benefits. Behavioral theories predict that managers are likely to exhibit shifts in their risk preferences in response to declining performance. Analyzing cost data from a cross-sectional sample of firms from the years 1992 through 2014, I find that managers shift investments away from less risky capital expenditures toward more risky R&D expenditures following periods of declining performance. I also examine and find moderating effects of firm losses, corporate governance, and financial incentives on the relationship between declining performance and firm investment behavior. These results suggest that managers take on additional operating risk through their investment decisions following periods of declining performance. The second essay, with Hsihui Chang and Curtis Hall, examines the effects of customer concentration levels on firm cost structure decisions. Analyzing cost data from a sample of manufacturing firms from 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 as well as controlling for endogeneity using a two-stage model. Our results suggest that suppliers respond to customer concentration by pursuing increased mutual dependence and cooperation with customers rather than attempting to reduce the effect of power imbalances within the supplier-customer relationship. This dissertation is accompanied by an extensive, multidisciplinary review of the literature related to managerial risk-taking, an important determinant of managers' cost management decisions which underlies both of these studies.

Essays on cost management

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Essays on cost management

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