The Review of Corporate Finance Studies Vol. 8 No. 1 2019
Inventory and Corporate Risk Management
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 hedges against net worth risk by smoothing investment in capital, regardless 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 firms’ net worth. Savings and inventory are both positively related to financing constraints and cash-flow risk, but investment is more sensitive to inventory. Received November 13, 2017, Editorial decision September 25, 2018 by Editor Uday Rajan.
- DOI
- 10.1093/rcfs/cfy007
- Volume
- 8
- Issue
- 1
- Pages
- 97-145
- Language
- en
- Sources
- bibtex:phds-export.bib crossref openalex