Inventory Behavior and Financial Constraints: Theory and Evidence
74 Pages Posted: 13 Feb 2014 Last revised: 3 Dec 2017
Date Written: November 26, 2017
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: Suggested Citation