Anomalous Operating Performance During Economic Slowdowns

What is it about?

We challenge the common perception that firms experiencing sales declines will show lower operating margins during economic slowdowns; on the contrary, we document that their margins are higher and these firms experience corresponding increases in operating cash flows, compared to their performance during normal periods. Our findings suggest that economic slowdowns facilitate the implementation of operational changes. Hence, the anomalously higher profitability is driven by improvement in operational efficiency and therefore is more persistent. Furthermore, in contrast to findings in real earnings management studies, we show that managers are reluctant to cut expenditures that could affect firms' future competitiveness during economic slowdowns. We highlight to readers that costs estimated by industry and year tend to be overestimated for sales-down firms during economic slowdown years and underestimated during the normal periods when we ignore the interaction effect of an individual firm's sales decline and macro-economic slowdown on managerial operating decisions.

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