Finance Constraints and Inventory Investment: Empirical Tests with Panel Data

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 not appear to generate differences in the sensitivity of inventory investment to cash flow during the sample period. JEL classification: E22, G14 Bank classification: Business fluctuations and cycles; Financial institutions