This dissertation empirically analyzes the effects of cost structure on cash holdings, capital structure and payout policy of firms listed on Korea Exchange from 1999 to 2015. In this dissertation, the cost structure refers to the coefficient for innovations in the growth rate of sales in the regression of the innovations of growth in operating costs on the innovations of growth in sales based on the methodology of Kahl, Lunn, and Nilsson(2012) and Kulchania(2016). The sample firms are categorized as either a fixed cost structure firm or a variable cost structure firm. The main results of the dissertation can be summarized as follows,
The second chapter empirically analyzes the effects of cost structure on corporate cash holdings and their marginal value. The cost structure has negative and significant effects on corporate cash holdings, meaning that firms with higher fixed costs relative to variable costs tend to hold more cash. This relation also shows that fixed cost structure firms with lower financial flexibility hold more cash, but variable cost structure firms with higher financial flexibility hold less cash. The results support for the research showing that firms with high operating leverage save more cash(Novy-Marx, 2011; Chen, Harford, and Kamara, 2014).
However, the cost structure has negative and significant effects on the marginal value of cash, implying that firms with higher fixed costs hold lower marginal value of cash. This result suggests that cash holdings may be value-destroying for shareholders when a fixed cost structure firm’s default risk increases due to higher fixed cost. It is also possible that managerial opportunism will play a further role, as a fixed cost structure firm’s managers have an incentive to hold large cash. Accordingly, this result partially supports the agency theory that a fixed cost structure firm’s managers tend to waste corporate resources by hoarding cash.
The third chapter empirically analyzes the effects of cost structure on firms'' capital structure. The cost structure has positive and significant effects on the corporate capital structure, meaning that firms with higher variable costs relative to fixed costs tend to hold more leverage. The result implies that fixed cost structure firms with lower financial flexibility have lower leverage ratios to reduce the probability of default risk. Even after controlling several characteristic variables, the cost structure still has the positive effects on corporate capital structure. Furthermore, in the frameworks of static and dynamic capital structure, the cost structure has consistently significant and positive effect on corporate capital structure.
The fourth chapter empirically analyzes the effects of cost structure on payout policy. The cost structure has significant and positive effects on dividends ratio or repurchases ratio, implying that the cost structure affects the choice of a payout policy. In particular, firms with higher fixed cost structure spend a lower fraction of their operating income on dividends or share repurchases. However, these firms are likely to prefer share repurchases to dividends, because share repurchases offers more flexibility than dividends. These results are consistent after controlling for firm characteristics, such as retained earnings, cash holdings, profitability, growth opportunities, capital expenditures, R&D intensity, financial leverage, firm size, financial constraints, and advertising cost expenditures.
In conclusion, after controlling for corporate characteristic variables, negative cost structure effects on the level of corporate cash holdings and their marginal value. This finding complements the agency theory argument that a fixed cost structure firm’s managers tend to waste corporate resources by hoarding cash. Overall, this finding suggests that default risk and agency problems are likely to co-exist in a fixed cost structure firm. Furthermore, the cost structure consistently has significant and positive effect on corporate capital structure in the frameworks of static and dynamic capital structure model. Moreover, firms’ cost structure affects the choice of a payout policy. Firms with higher fixed cost structure pay a higher fraction of their payouts via share repurchases because this method offers greater financial flexibility. This finding also contributes to the extant literature that examines the association among corporate cash holdings, capital structure, payout policy and cost structure.
This dissertation has a few limitations because it is an early study on how the cost structure affects corporate cash holdings, capital structure and payout policy. The dissertation does not capture every subtle feature of the effects on corporate cash holdings, capital structure and payout policy. In this regard, future studies should consider a larger sample and broader range of control variables, and apply more sophisticated analytical methods.