Information Environment and Cost Asymmetry

We examine the effect of firms’ information environment on asymmetric cost behavior (i.e. cost stickiness). Using plausibly exogenous variation in the information environment stemming from brokerage house closures, we find that cost stickiness reduces in response to adverse changes in firms’ information environment. This effect is more pronounced for firms characterized, ex ante, by poorer reporting quality, higher information uncertainty, lower institutional holdings, greater financial constraints, and lower resource adjustment costs. Additional analysis reveals that managers respond to adverse information shocks by reducing expenditures that are less likely to create future value, thereby paving way for higher enterprise valuation. Our paper contributes to the growing literature on cost behavior research by documenting the link between firms’ external information environment and internal cost management.