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Firms' stock market flotation: Effects on inventory policy

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  • Tribó, Josep A.

Abstract

In this article, we argue that firms that are floated on the stock market are subject to close scrutiny by financial markets, which hinder them from implementing the type of empire-building overinvestment policies that may generate inventory accumulation (the signaling role of inventories). Also, listed firms have more resource availability to finance their investment projects and do not need to use inventories as a tool for dealing with their liquidity requirements (the liquidity role). Taking into account both these roles--signaling and liquidity--our main hypothesis is that after a firm is listed on the stock market, there is a decline in its inventory level as well as in its inventory variability, especially in those firms with larger liquidity needs (i.e., small firms and/or firms with financial difficulties). We further argue that the reductions in inventories will be larger for equity issues than for debt issues. Using a sample of US manufacturing firms for the period 1994-2004, we find evidence that conforms to our theoretical predictions, suggesting a natural stabilizing mechanism that may smooth the economic cycle.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Production Economics.

Volume (Year): 118 (2009)
Issue (Month): 1 (March)
Pages: 10-18

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Handle: RePEc:eee:proeco:v:118:y:2009:i:1:p:10-18

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Web page: http://www.elsevier.com/locate/ijpe

Related research

Keywords: Inventory policy Stock market flotation Share issues;

References

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  1. Josep A. Tribó, 2004. "Ownership Structure And Inventory Policy," Business Economics Working Papers wb043211, Universidad Carlos III, Departamento de Economía de la Empresa.
  2. Margaret M. McConnell & Gabriel Perez Quiros, 1998. "Output fluctuations in the United States: what has changed since the early 1980s?," Staff Reports 41, Federal Reserve Bank of New York.
  3. Jay R. Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," Journal of Finance, American Finance Association, vol. 57(4), pages 1795-1828, 08.
  4. Hendel, Igal, 1996. "Competition under Financial Distress," Journal of Industrial Economics, Wiley Blackwell, vol. 44(3), pages 309-24, September.
  5. Rotemberg, Julio J & Saloner, Garth, 1989. "The Cyclical Behavior of Strategic Inventories," The Quarterly Journal of Economics, MIT Press, vol. 104(1), pages 73-97, February.
  6. Richard Kum-yew Lai, 2005. "Inventory and the Stock Market," Finance 0509006, EconWPA.
  7. Charles W. Calomiris & Charles P. Himmelberg & Paul Wachtel, 1994. "Commercial Paper, Corporate Finance and the Business Cycle: A Microeconomic Perspective," Working Papers 94-17, New York University, Leonard N. Stern School of Business, Department of Economics.
  8. Anil K. Kashyap & Owen A. Lamont & Jeremy C. Stein, 1993. "Credit conditions and the cyclical behavior of inventories," Working Paper Series, Macroeconomic Issues 93-7, Federal Reserve Bank of Chicago.
  9. Gertler, Mark & Gilchrist, Simon, 1993. " The Role of Credit Market Imperfections in the Monetary Transmission Mechanism: Arguments and Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(1), pages 43-64.
  10. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1994. "Inventory (Dis)Investment, Internal Finance Fluctuations, and the Business Cycle," Macroeconomics 9401001, EconWPA.
  11. Lai, Richard, 2006. "Inventory Signals," MPRA Paper 4753, University Library of Munich, Germany.
  12. Alan S. Blinder & Louis J. Maccini, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 73-96, Winter.
  13. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  14. Hong Chen & Murray Z. Frank & Owen Q. Wu, 2005. "What Actually Happened to the Inventories of American Companies Between 1981 and 2000?," Management Science, INFORMS, vol. 51(7), pages 1015-1031, July.
  15. Guariglia, Alessandra, 2000. " Inventory Investment and Capital Market Imperfections: A Generalization of the Linear Quadratic Inventory Model," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(2), pages 223-42, May.
  16. Krautter, Jochen, 1999. "Inventory theory: New perspectives for corporate management," International Journal of Production Economics, Elsevier, vol. 59(1-3), pages 129-134, March.
  17. Tribo, Josep A., 2001. "Inventories, financial structure and market structure," International Journal of Production Economics, Elsevier, vol. 71(1-3), pages 79-89, May.
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Cited by:
  1. Elsayed, Khaled & Wahba, Hayam, 2013. "Reinvestigating the relationship between ownership structure and inventory management: A corporate governanceperspective," International Journal of Production Economics, Elsevier, vol. 143(1), pages 207-218.

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