Inventory and Corporate Risk Management

WBS Finance Group Research Paper

Review of Corporate Finance Studies, forthcoming

75 Pages Posted: 18 Sep 2015 Last revised: 2 Oct 2018

See all articles by Marco Bianco

Marco Bianco

University of Bologna - Department of Management

Andrea Gamba

University of Warwick - Finance Group

Date Written: October 1, 2018

Abstract

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

Bianco, Marco and Gamba, Andrea, Inventory and Corporate Risk Management (October 1, 2018). Review of Corporate Finance Studies, forthcoming. Available at SSRN: https://ssrn.com/abstract=2661384 or http://dx.doi.org/10.2139/ssrn.2661384

Marco Bianco

University of Bologna - Department of Management ( email )

Piazza Scaravilli 1
Bologna, Bologna 40126
ITALY

Andrea Gamba (Contact Author)

University of Warwick - Finance Group ( email )

Scarman Road
Coventry, CV4 7AL
Great Britain
+44 (0)24 765 24 542 (Phone)
+44 (0)24 765 23 779 (Fax)

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