Inventory, Fixed Capital, and the Cross-Section of Corporate Investment
67 Pages Posted: 19 Aug 2012 Last revised: 17 Oct 2019
Date Written: July 1, 2019
Low adjustment cost for inventory implies that firms can optimally substitute inventory investment for fixed investment by weighing incremental gains against total costs of adjusting the two types of capital. I empirically show that such inventory dependence—arising due to adjustment-cost difference and substitutability—renders firms' fixed investment significantly less responsive to various measures of investment demand. An analysis from the allocation-of-funds standpoint reveals that in response to one additional dollar available, a high inventory-dependence firm spends 14 cents more (8 cents less) on inventory investment (fixed investment) than does a low dependence firm although the total allocation to investing activities is similar across the two types of firms. Overall, this article uncovers substantial firm heterogeneity in inventory dependence and its impact, there providing empirical guidance for accounting for it in one's analysis of corporate policy.
Keywords: inventory, corporate investment, adjustment cost difference, substitutability
JEL Classification: G31, E22
Suggested Citation: Suggested Citation