Asymmetric Cost Behaviour and Financial Slack: Evidence from Swedish Manufacturing Firms

Abstract

This study examines how Swedish manufacturing firms adjust operating costs in response to changes in revenue, using operating cost-to-revenue elasticities, and analyses how financial slack may influence these adjustments. Prior research on cost asymmetry has primarily focused on cost stickiness and its determinants, while paying limited attention to how internal financial conditions may shape firms' cost responses across different revenue states. The study uses quarterly panel data from a sample of Swedish manufacturing firms between 2004 and 2024 and applies a two-way fixed-effects regression model to analyse the elasticity of operating costs across three states: revenue growth, normal decline, and large decline. The findings indicate that Swedish manufacturing firms exhibit anti-sticky cost behaviour, as costs decrease more during moderate revenue declines than they increase during revenue growth. The cost elasticities are, on average, higher during normal declines than during large declines, where uncertainty and progressively more consequential adjustment costs may limit further reductions. The findings also suggest that financial slack has a negative association with cost elasticities, indicating that firms with larger working capital buffers may adjust their operating costs less in response to changes in revenue. Decomposition of financial slack also revealed that this finding is driven primarily by cash holdings rather than non-cash current assets. The study contributes to the literature by extending research on cost asymmetry across different revenue states, incorporating perspectives on financial slack, and providing new evidence from the Swedish manufacturing context.