Managers’ Inventory Holding Decisions in Response to Natural Disasters

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