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Inventory (Dis)Investment, Internal Finance Fluctuations, and the Business Cycle

  • Robert E. Carpenter

    (Emory University)

  • Steven M. Fazzari

    (Washington University and the Jerome Levy Economics Insititute)

  • Bruce C. Petersen

    (Washington University)

A well-known but under-emphasized feature of the business cycle is that the flow of internal finance is highly procyclical. We argue that finance constraints lead firms to offset a large proportion of internal finance fluctuations through inventory (dis)investment. We construct three panels of quarterly firm data, each of which contains a large fraction of aggregate inventories and covers a major inventory cycle. Our findings show that the impact of internal finance on inventory investment is greater for small firms than large, consistent with the existence of finance constraints. Internal finance, however, is also economically important for large firms. These results explain part of the large cyclical amplitude of inventory investment. Furthermore, heterogeneity in our results across time, especially between the 1981-82 recession and the 1990-91 recession, helps explain differences in the composition of aggregate investment shortfalls during contractions.

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Paper provided by EconWPA in its series Macroeconomics with number 9401001.

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Length: 29 pages
Date of creation: 12 Jan 1994
Date of revision:
Handle: RePEc:wpa:wuwpma:9401001
Note: 2 word for windows binary files. File 1 has 29 pages text with one table enclosed. File 2 has 5 tables in 4 pages. 3 figures accompany this paper but are not enclosed. They are available upon request from Carpenter
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  11. Krane, Spencer D & Braun, Stephen N, 1991. "Production Smoothing Evidence from Physical-Product Data," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 558-81, June.
  12. R. Glenn Hubbard & Anil Kashyap, 1990. "Internal Net Worth and the Investment Process: An Application to U.S. Agriculture," NBER Working Papers 3339, National Bureau of Economic Research, Inc.
  13. Alan S. Blinder & Louis J. Maccini, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 73-96, Winter.
  14. Richard W. Kopcke, 1993. "The determinants of business investment: has capital spending been surprisingly low?," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 3-31.
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  17. Gertler, Mark, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(3), pages 559-88, August.
  18. Alan S. Blinder & Louis J. Maccini, 1990. "The Resurgence of Inventory Research: What Have We Learned?," NBER Working Papers 3408, National Bureau of Economic Research, Inc.
  19. Zarnowitz, Victor, 1992. "Business Cycles," National Bureau of Economic Research Books, University of Chicago Press, number 9780226978901.
  20. Calomiris, Charles W & Hubbard, R Glenn, 1990. "Firm Heterogeneity, Internal Finance, and 'Credit Rationing.'," Economic Journal, Royal Economic Society, vol. 100(399), pages 90-104, March.
  21. Michael Devereux & Fabio Schiantarelli, 1989. "Investment, Finacial Factors and Cash Flow: Evidence From UK Panel Data," NBER Working Papers 3116, National Bureau of Economic Research, Inc.
  22. Donald P. Morgan, 1991. "Will just-in-time inventory techniques dampen recessions?," Economic Review, Federal Reserve Bank of Kansas City, issue Mar, pages 21-33.
  23. Anil K. Kashyap & Owen A. Lamont & Jeremy C. Stein, 1993. "Credit conditions and the cyclical behavior of inventories," Working Paper Series, Macroeconomic Issues 93-7, Federal Reserve Bank of Chicago.
  24. 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.
  25. Whited, Toni M., 1991. "Investment and financial asset accumulation," Journal of Financial Intermediation, Elsevier, vol. 1(4), pages 307-334, December.
  26. George L. Perry & Charles L. Schultze, 1993. "Was This Recession Different? Are They All Different?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 145-212.
  27. Ramey, Valerie A, 1989. "Inventories as Factors of Production and Economic Fluctuations," American Economic Review, American Economic Association, vol. 79(3), pages 338-54, June.
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