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Finance Constraints and Inventory Investment: Empirical Tests with Panel Data

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  • Rose Cunningham

    (Bank of Canada)

Abstract

The author empirically tests two aspects of the interaction between financial variables and inventory investment: negative cash flow and finance constraints due to asymmetric information. This is one of the first studies of inventory investment and finance constraints using Canadian data. A sample of Canadian manufacturing firms over the period 1992Q2-1999Q4 is split into subsamples based on age, bond rating, and size to reflect expected differences in degrees of asymmetric information problems. The findings are consistent with a model in which inventory investment is a U-shaped function of cash flow. Higher degrees of information asymmetry do no appear to generate differences in the sensitivity of inventory investment to cash flow during the sample period.

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File URL: http://128.118.178.162/eps/mac/papers/0411/0411015.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0411015.

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Length: 29 pages
Date of creation: 22 Nov 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0411015

Note: Type of Document - pdf; pages: 29
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Web page: http://128.118.178.162

Related research

Keywords: information asymmetries; finance constraints; liquidity constraints; inventories; inventory investment; Povel and Raith model; negative cash flow;

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References

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  1. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series 82, Board of Governors of the Federal Reserve System (U.S.).
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  3. Alessandra Guariglia, . "The Effects of Financial Constraints on Inventory Investment: Evidence from a Panel of UK Firms," Economics Discussion Papers 462, University of Essex, Department of Economics.
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  8. Cleary, Sean & Povel, Paul & Raith, Michael, 2007. "The U-Shaped Investment Curve: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(01), pages 1-39, March.
  9. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  10. Gertler, Mark & Gilchrist, Simon, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 309-40, May.
  11. Egon Zakrajsek, 1997. "Retail inventories, internal finance, and aggregate fluctuations," Research Paper 9722, Federal Reserve Bank of New York.
  12. Anil K Kashyap & Jeremy C. Stein & David W. Wilcox, 1992. "Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance," NBER Working Papers 4015, National Bureau of Economic Research, Inc.
  13. Kaplan, Steven N & Zingales, Luigi, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 169-215, February.
  14. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
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  16. Huntley Schaller, 1993. "Asymmetric Information, Liquidity Constraints and Canadian Investment," Canadian Journal of Economics, Canadian Economics Association, vol. 26(3), pages 552-74, August.
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Citations

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Cited by:
  1. Gianni La Cava, 2005. "Financial Constraints, the User Cost of Capital and Corporate Investment in Australia," RBA Research Discussion Papers rdp2005-12, Reserve Bank of Australia.
  2. Jerzy Marzec & Małgorzata Pawłowska, 2012. "Zależność między kredytem kupieckim a bankowym w modelu zapasów – wyniki badań branżowych w Polsce," Collegium of Economic Analysis Annals, Warsaw School of Economics, Collegium of Economic Analysis, issue 26, pages 117-128.

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