Inventory Behavior and Financial Constraints: Theory and Evidence

74 Pages Posted: 13 Feb 2014 Last revised: 3 Dec 2017

See all articles by Sudipto Dasgupta

Sudipto Dasgupta

Chinese University of Hong Kong and CEPR

Erica X. N. Li

University of Michigan, Stephen M. Ross School of Business

Dong Yan

Stockholm School of Economics; Swedish House of Finance

Date Written: November 26, 2017

Abstract

Financially constrained firms hold more inventory than do financially unconstrained firms and also show more volatility in inventory holdings. To understand why, we model the interaction of financial constraints, capacity constraints, and the response of production and inventory to cost and demand shocks. We develop several implications as to how financial constraints affect the inventory response to cost shocks of constrained firms relative to unconstrained firms. We find consistent results when we take these implications to the real data.

Keywords: Inventory, Financial Constraints, Capital Investments

JEL Classification: G30, G31

Suggested Citation

Dasgupta, Sudipto and Li, Erica X. N. and Yan, Dong, Inventory Behavior and Financial Constraints: Theory and Evidence (November 26, 2017). Asian Finance Association (AsianFA) 2014 Conference Paper; 27th Australasian Finance and Banking Conference 2014 Paper; Swedish House of Finance Research Paper No. 16-17. Available at SSRN: https://ssrn.com/abstract=2395018 or http://dx.doi.org/10.2139/ssrn.2395018

Sudipto Dasgupta (Contact Author)

Chinese University of Hong Kong and CEPR ( email )

CUHK, Cheng Yu Tung Building, Room 1224
Shatin, NT
Hong Kong
Hong Kong

Erica X. N. Li

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Dong Yan

Stockholm School of Economics ( email )

Drottninggatan 98
Stockholm, 111 60
Sweden

Swedish House of Finance

Drottninggatan 98
111 60 Stockholm
Sweden

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