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Retail inventories, internal finance, and aggregate fluctuations

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Author Info
Egon Zakrajsek
Abstract

We investigate the implications of capital market imperfections for inventory investment in retail trade, using a new source firm-level data--the micro data underlying the published Quarterly Financial Reports. An error-correction model that includes internal funds and forward-looking expectations for the stochastic process of sales is not rejected by the data. Both the cross-sectional and time-series results are consistent with the existence of significant capital market frictions in the retail trade sector: (1) for firms with limited access to capital markets, internal funds are a significant predictor of inventory investment; (2) the predictive power of internal funds is highly asymmetric over a business cycle, rising considerably in recessions. The quantitative significance of financial factors suggests that a large portion of the observed volatility in aggregate retail inventory investment over a business cycle is due to fluctuations in internal funds

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Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9722.

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Date of creation: 1997
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Handle: RePEc:fip:fednrp:9722

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Keywords: Retail trade ; Inventories ; Business cycles ; Capital market;

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    Other versions:
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  16. Granger, C W J & Lee, T H, 1989. "Investigation of Production, Sales and Inventory Relationships Using Multicointegration and Non-symmetric Error Correction Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(S), pages S145-59, Supplemen. [Downloadable!] (restricted)
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  20. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-79, September. [Downloadable!] (restricted)
  21. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 7-29, January. [Downloadable!] (restricted)
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  24. West, Kenneth D, 1986. "A Variance Bounds Test of the Linear Quadratic Inventory Model," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 374-401, April. [Downloadable!] (restricted)
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