The Effect of Ownership and Financing on Firm's Inventory and Profitability: An Empirical Analysis
33 Pages Posted: 29 Dec 2015
Date Written: December 28, 2015
We use a large-scale, firm-level panel dataset on Chinese manufacturing firms to examine the effect of ownership structure on inventory, the relationship between inventory and profitability and the effect of the availability of external financial resources on inventory for each ownership type firms. In addition, we test a number of the operational level factors examined in the prior literature such as capital intensity, gross margin, and sales growth in the setting of an emerging market (i.e., China). Our key findings are: (1) State owned firms, on average, have the higher inventory, than private firms. Relative to private firms, state owned firms hold inventories that are, on average, 4 million dollars higher. (2) The inventory for state owned firms decreases while that for foreign firms increases when external financial resources become more available to non-state firms. Interestingly, foreign firms may have lower inventory than private firms when the external financial resources are not sufficiently available but higher inventory than private firms when the external financial resources are sufficiently available. (3) Firms with lower inventory are associated with greater financial performance as measured by both returns on assets (ROA) and returns on sales (ROS). (4) And finally, firms with lower gross margin, higher capital intensity, higher cost of capital and higher sales growth have lower inventory. We discuss the theoretical and managerial implications of the findings.
Keywords: Inventory, Ownership Structure, Financial Markets, Emerging Markets
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