Inventory and Corporate Risk Management
Review of Corporate Finance Studies, forthcoming
75 Pages Posted: 18 Sep 2015 Last revised: 26 Dec 2019
Date Written: October 1, 2018
We consider a dynamic model of investment in which a firm can hold inventory to mitigate the price risk of an input commodity. Our model predicts that inventory allows to hedge against net worth risk by smoothing investment in capital, irrespective of the level of current net worth. Savings enhance the operational hedge offered by inventory, because they better conserve net worth when the commodity price is low. These predictions are confirmed in a sample of U.S. manufacturing corporations. We find that the empirical sensitivity of inventory investment to price changes is positive for any level of the firm’s net worth. While savings and inventory are both positively related to financing constraints and cash flow risk, investment is more sensitive to inventory.
Keywords: Corporate Risk Management, Inventory, Hedging, Cash Holdings
JEL Classification: G31, G32
Suggested Citation: Suggested Citation