Cost Structure and Firm Risk: Implications from Recent Theoretical and Empirical Studies

Abstract

Firm value is determined by the future free cash flow and the discount rate that reflects the firm risks. Recent studies reveal that a firm’s cost structure is closely linked to its risk. This study discusses the association between a firm’s cost structure and risk, and highlights the importance of focusing on management incentives to examine these cost structures in management accounting. Further, I examine empirical literature on asymmetric cost behavior, especially regarding the asymmetric CVP model, in which management incentives serve as key factors in studying cost structures. Finally, I suggest that the theory of the firm as the cost function and agency-theory model should be analyzed in a unified framework.