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Inventory investment and the cost of capital

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  • Jones, Christopher S.
  • Tuzel, Selale
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    Abstract

    We examine the relation between inventory investment and the cost of capital in the time series and the cross section. We find consistent evidence that risk premiums, rather than real interest rates, are strongly negatively related to future inventory growth at the aggregate, industry, and firm levels. The effect is stronger for firms in industries that produce durables rather than nondurables, exhibit greater cyclicality in sales, require longer lead times, and are subject to more technological innovation. We then construct a production-based asset pricing model with two types of capital, fixed capital and inventories, to explain these empirical findings. Convex adjustment costs and a countercyclical price of risk lead to negative time series and cross-sectional relations between expected returns and inventory growth.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 107 (2013)
    Issue (Month): 3 ()
    Pages: 557-579

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    Handle: RePEc:eee:jfinec:v:107:y:2013:i:3:p:557-579

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Inventory investment; Return predictability; Real investments;

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    References

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    Cited by:
    1. : Gianni De Nicolo & : Andrea Gamba & : Marcella Lucchetta, 2013. "Microprudential Regulation in a Dynamic Model of Banking," Working Papers wpn13-04, Warwick Business School, Finance Group.
    2. Gianni La Cava, 2013. "Inventory Investment in Australia and the Global Financial Crisis," RBA Research Discussion Papers rdp2013-13, Reserve Bank of Australia.

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