Does Cost Stickiness Affect Capital Structure? Evidence from Korea

[Purpose] This study examines how the stickiness cost behavior might affect the capital structure in non－financial firms listed on the Korea Composite Stock Price Index (KOSPI) during the period of 2010－2017. [Methodology] This paper employed total, short－term and long－term debt ratios as dependent variables, and stickiness of SG&A expenses as an independent variable. The multiple linear regression analysis has been performed on the 1,266 firm－year observations. [Findings] We found a significant negative relationship between the asymmetrical behavior of cost and capital structure in firms with high－level of cost stickiness, whereas the influence of stickiness of SG&A on debt ratios is insignificant for companies with low－level of cost stickiness. In other words, when the stickiness of SG&A expenses increases by one unit, the debt ratio will decrease by 0.822 (Model 1) and 0.521 (Model 2) for Korean nonfinancial firms with high－level of cost stickiness. These findings are consistent with previous studies performed by Du, Liu, and Shen (2012), Mihov (2013), Kahl, Lunn, and Nilsson (2014), and Abu－Serdaneh (2014) showing that firms with higher fixed costs in their costs structure should borrow less debt. [Implications] To sum up, the capital structure in firms with high－level of cost stickiness is negatively influenced by the asymmetrical behavior of cost. This paper complements the literature of corporate finance and accounting cost stickiness literature since it incorporates the impact of degree of cost stickiness as an internal determinant on the capital structure and the firm’s financial policy. For future research, we suggest analyzing the effect of macroeconomic and industrial factors and include measures of leverage dispersion and industry concentration in our model.