Cost Uniqueness: An Alternative Lens for Examining Cost Behavior
Date
2023-09-06
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Abstract
Cost information is a critical input required for profit analysis, earnings estimation, and firm valuation by capital market participants (Banker and Chen 2006; Weiss 2010; Ciftci et al. 2016). Conventional methods of understanding cost behavior seek to separate costs based on their movements relative to production volume. In a set of three essays, I investigate an alternative lens for examining cost behavior. In my approach, I seek to separate cost movements driven by firm-specific factors from movements that are common to industry or market peers. I refer to this as “cost uniqueness”. In the first of my essays, I describe this new construct of cost uniqueness, and I identify a method to empirically measure this new construct. Firm-specific cost variations are of special interest because costs reflect the inner workings of the firm that are opaque to investors. To establish the importance of measuring cost uniqueness, I investigate the effects of cost uniqueness on information uncertainty for external users by looking at the forecasting difficulty faced by financial analysts. In my second essay, I conduct an exploratory investigation into the forces that potentially drive some firms to be more unique than others. I organize my search around three distinct forces that can shape costs, namely, internal firm characteristics, external environment, and manager-specific characteristics. Within these three dimensions, I specifically examine various factors pertaining to the incentives and capabilities of firms to operate distinctively from their peers. In my third essay, I delve into some of the implications of cost uniqueness for firms. I examine the relationship between cost uniqueness and firm value to assess whether cost uniqueness is driven by managers’ value-enhancing activities or by value-destroying activities. I also investigate what measures a firm can take to mitigate the information uncertainty associated with cost uniqueness. Specifically, I examine whether firms increase their disclosure of cost items to help outsiders unpack cost uniqueness.
Description
Keywords
Cost Uniqueness, Information Uncertainty, Firm Value
Citation
Wang, Y. (2023). Cost uniqueness: an alternative lens for examining cost behavior (Doctoral thesis, University of Calgary, Calgary, Canada). Retrieved from https://prism.ucalgary.ca.