The Effects of Financial Constraints on Inventory Investment: Evidence from a Panel of UK Firms
The objective of this paper is to analyze the linkage between internal finance and inventory investment using a large panel of U.K. manufacturing firms from 1968 to 1991. Firms are classified into two groups: those more and those less likely to face financial constraints. The estimates of several equations for inventory growth augmented with the coverage ratio indicate a significant effect of the latter on inventory investment for the former group during periods of recession and tight monetary policy. This effect is particularly strong for work-in-process and raw material inventories that are characterized by low adjustment costs. Copyright 1999 by The London School of Economics and Political Science
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