Managers’ Inventory Holding Decisions in Response to Natural Disasters

Abstract

We study how firms’ inventory holdings are affected by natural disasters, which plausibly comprise both the real effects due to disaster disruptions and the expectations effects wherein managers change their assessments of future disaster risk after the occurrence of disasters in neighboring counties. Our main findings suggest that expectations effects play a more prominent role than real effects, with managers increasing inventory holdings to hedge against the scenario of product demand surges after future disasters. A battery of tests including cross-sectional evidence and an event study suggest that inventory stockpiling is more likely driven by managers relying on availability heuristics and overestimating future disaster odds rather than a rational expectations equilibrium where managers gradually learn their intrinsic disaster risks. Collectively, our results highlight another undesirable consequence of natural disasters and warn about supply chain implications due to increased climate ambiguity.

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