Managers’ Inventory Holding Decisions in Response to Natural Disasters

56 Pages Posted: 6 Apr 2023 Last revised: 26 Sep 2023

See all articles by Seunghyun Cho

Seunghyun Cho

KAIST College of Business

Boochun Jung

University of Hawaii at Manoa - School of Accountancy

Felipe Bastos G. Silva

University of Missouri, Columbia

Choong-Yuel Yoo

KAIST College of Business

Date Written: January 9, 2023

Abstract

We examine whether managers stockpile excess inventory after experiencing natural disasters. Using major disasters in the U.S. between 1993 and 2018, we document that after the occurrence of natural disasters firms located in nearby areas stockpile excess inventory. The post-disaster effect is stronger when a disaster is more catastrophic, suggesting that managers experiencing more salient events tend to stockpile excess inventories to a greater extent. We further show that the effect is more pronounced for firms with higher stockout costs and lower labor adjustment costs. The post-disaster decision to temporarily hoard inventory is not related to earnings management incentives and it leads to poor firm performance. Overall, our findings highlight the importance of managers’ subjective risk perceptions in inventory-holding decisions.

Keywords: Earthquake; hurricane; natural disaster; inventory management; availability heuristic; risk perceptions; operational risk; stockout costs; labor adjustment costs

JEL Classification: G31, G41, M21, M11, M41, Q54

Suggested Citation

Cho, Seunghyun and Jung, Boochun and Silva, Felipe Bastos G. and Yoo, Choong-Yuel, Managers’ Inventory Holding Decisions in Response to Natural Disasters (January 9, 2023). KAIST College of Business Working Paper Series No. 2023-002, Available at SSRN: https://ssrn.com/abstract=4323434 or http://dx.doi.org/10.2139/ssrn.4323434

Seunghyun Cho

KAIST College of Business ( email )

85 Hoegiro, Dongdaemun-gu
Seoul 02455
Korea, Republic of (South Korea)

Boochun Jung

University of Hawaii at Manoa - School of Accountancy ( email )

College of Business Administration
Honolulu, HI 96822
United States

Felipe Bastos G. Silva

University of Missouri, Columbia ( email )

331 Cornell Hall
Columbia, MO 65211
United States
5738829905 (Phone)

Choong-Yuel Yoo (Contact Author)

KAIST College of Business ( email )

85 Hoegiro, Dongdaemoon-gu
Seoul, 02455
Korea, Republic of (South Korea)

HOME PAGE: http://www.business.kaist.edu/faculty/cyoo

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