Financing constraints and inventories [An article from: European Economic Review]

This digital document is a journal article from European Economic Review, published by Elsevier in 2004. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
This paper investigates the impact of financing constraints on firms' inventory and cash management. In particular, it examines the extent to which the presence of such constraints may account for certain empirical regularities. These include, e.g., the excess variance of production vis-a-vis that of sales, as well as the counter-cyclicality and persistence of the inventory-sales ratio. We model the intertemporal decision-making on production, cash retention and dividends of a firm that is exposed to stochastic demand shocks in every period and faces constrained access to external sources of finance. It is found that the presence of financing constraints can explain the excess variance of production in a model which otherwise would not deliver this result. Moreover, as long as demand is positively serially correlated they also contribute to the counter-cyclicality and persistence of the inventory-sales ratio. The paper suggests that financing constraints should not be discarded as a factor driving the cyclical behaviour of inventories.