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    Rights statement: This is a pre-copy-editing, author-produced PDF of an article accepted for publication in The Review of Financial Studies following peer review. The definitive publisher-authenticated version Sudipto Dasgupta, Erica X N Li, Dong Yan; Inventory Behavior and Financial Constraints: Theory and Evidence, The Review of Financial Studies, , hhy064, https://doi.org/10.1093/rfs/hhy064 is available online at: https://academic.oup.com/rfs/article/32/3/1188/5036235

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    Embargo ends: 12/06/20

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Inventory Behavior and Financial Constraints: Theory and Evidence

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>1/03/2019
<mark>Journal</mark>Review of Financial Studies
Issue number3
Volume32
Number of pages46
Pages (from-to)1188–1233
Publication statusPublished
Early online date12/06/18
Original languageEnglish

Abstract

We model the interaction of financial constraints, capacity constraints, and the response of production and inventory to cost and demand shocks. The model predicts that in response to favorable shocks, financially constrained firms are unable to build inventory as rapidly as are unconstrained firms. However, because the favorable shocks gradually ease the financial constraints, constrained firms continue to build inventory and eventually carry surplus inventory (relative to unconstrained firms) to unfavorable states. This allows them to deplete inventory more aggressively in response to unfavorable shocks. Our empirical evidence provides broad support for the model’s predictions.

Bibliographic note

This is a pre-copy-editing, author-produced PDF of an article accepted for publication in The Review of Financial Studies following peer review. The definitive publisher-authenticated version Sudipto Dasgupta, Erica X N Li, Dong Yan; Inventory Behavior and Financial Constraints: Theory and Evidence, The Review of Financial Studies, , hhy064, https://doi.org/10.1093/rfs/hhy064 is available online at: https://academic.oup.com/rfs/article/32/3/1188/5036235