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The Effect of Financial Constraints on Inventory Holdings

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  • Bustos, Emil

    (Research Institute of Industrial Economics (IFN))

Abstract

This paper investigates the impact of financial constraints on firms’ inventory holdings, an area of significant interest given that inventories are volatile over the business cycle. I use detailed data on Swedish firms’ balance sheets, income statements, and credit scores. I employ a regression discontinuity design and a difference-in-differences analysis to examine the causal effects of financial constraints on inventory management. Firms with relaxed financing constraints increase their inventories by 20% when they get a better credit score, yet there is no robust effect on inventories relative to firm size. This study offers new insights into the influence of financial constraints on firms’ inventory strategies amidst changing economic conditions.

Suggested Citation

  • Bustos, Emil, 2023. "The Effect of Financial Constraints on Inventory Holdings," Working Paper Series 1463, Research Institute of Industrial Economics.
    • Handle: RePEc:hhs:iuiwop:1463
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial Constraints; Risk Management; Inventories; Credit Scores; Private Firms;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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