Inventory investment and the cost of capital

Christopher S. Jones and Selale Tuzel

Journal of Financial Economics, 2013, vol. 107, issue 3, 557-579

Abstract: We examine the relation between inventory investment and the cost of capital in the time series and the cross section. We find consistent evidence that risk premiums, rather than real interest rates, are strongly negatively related to future inventory growth at the aggregate, industry, and firm levels. The effect is stronger for firms in industries that produce durables rather than nondurables, exhibit greater cyclicality in sales, require longer lead times, and are subject to more technological innovation. We then construct a production-based asset pricing model with two types of capital, fixed capital and inventories, to explain these empirical findings. Convex adjustment costs and a countercyclical price of risk lead to negative time series and cross-sectional relations between expected returns and inventory growth.

Keywords: Inventory investment; Return predictability; Real investments (search for similar items in EconPapers)
JEL-codes: E32 E44 G31 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (36)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:107:y:2013:i:3:p:557-579

DOI: 10.1016/j.jfineco.2012.09.001

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