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Inventory and the Stock Market

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  • Richard Kum-yew Lai

    (Harvard Business School)

Abstract

About inventory models, a concern is 'often made [that] any resemblances between the models constructed and reality are purely coincidental.' One set of factors not usually considered in textbook models of inventory decisions is suggested by well-documented evidence in macroeconomics, that the stock market affects investment decisions. Does the stock market also affect inventory decisions, and how? I study four hypotheses. The first is that the market could be a side-show, with no impact on firms' decisions. The second is that the market influences inventory decisions via a financing channel. When the market over-values firms, firms can get easier and cheaper financing, and tend to increase their inventory. The third is a dissipation channel. When the market over-values firms, firms are less disciplined and let inventories rise. The last is a catering channel. When the market discounts high-inventory firms, firms decrease their inventory, and vice versa. I report evidence that rejects the first, weakly supports the second and third, and strongly supports the fourth hypotheses. This evidence contributes to an emerging area for empirical research, at the intersection of finance and operations management.

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File URL: http://128.118.178.162/eps/fin/papers/0509/0509006.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0509006.

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Length: 30 pages
Date of creation: 04 Sep 2005
Date of revision:
Handle: RePEc:wpa:wuwpfi:0509006

Note: Type of Document - pdf; pages: 30
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Web page: http://128.118.178.162

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Keywords: inventory; stock market; sentiment; operations management;

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Cited by:
  1. Tribó, Josep A., 2009. "Firms' stock market flotation: Effects on inventory policy," International Journal of Production Economics, Elsevier, vol. 118(1), pages 10-18, March.
  2. 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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