Inventory Management Under Financial Constraints
Speaker: Prof. Javad Nasiry (Hong Kong University of Science and Technology)
Financial market inefficiencies do not affect all firms homogenously. Financially constrained firms have limited or no access to financial markets and rely more heavily on internal resources to finance their operations. We show that financially constrained firms hold relatively higher inventory and have lower inventory turnover. Using two distinct approaches, we suggest the link is causal. We first investigate the effect of the 2008 financial crisis on the inventory performance of financially constrained versus unconstrained firms. We apply a difference-in-difference methodology to a sample of public U.S. manufacturing firms from 2005 to 2017. We divide the sample into a control group (financially unconstrained firms) and a treatment group (financially constrained firms) using three widely-applied measures of financial constraints: size, Whited-Wu index, and Hadlock-Pierce index. We compare the inventory level, inventory turnover, and adjusted inventory turnover of constrained versus unconstrained firms before and after the crisis.
Our findings show that, financially constrained firms are more efficient after the 2008 financial crisis: they operate leaner (lower levels of inventory and higher inventory turnover) relative to financially unconstrained firms. Although the effect of the crisis on inventory level is immediate and persistent over time (all years in 2009-2017), we observe the improvements on inventory turnover in the `long run' (2012-2017).
In a second approach, we use a unique dataset (Dealscan) that records the loans firms acquire from banks. Those firms with active loans from banks that went bankrupt in the 2008 financial crisis (e.g., Lehman Brothers) are financially constrained at least prior to them establishing new bank lending channels. We test our hypotheses using this dataset and find evidence for the causal impact of financial constraints on inventory management policies.
The extant literature has established that inventory productivity strongly predicts firms' performance and our results show how differences in firms' access to financial resources affect their inventory management policies and sales in response to financial crises. We suggest then that it is imperative to incorporate firms' financial constraints in studying their operational decisions.