Inventory and Corporate Risk Management

Marco Bianco and Andrea Gamba

The Review of Corporate Finance Studies, 2019, vol. 8, issue 1, 97-145

Abstract: We consider a dynamic model of investment in which a firm can hold inventory to mitigate the price risk of an input commodity. Our model predicts that inventory hedges against net worth risk by smoothing investment in capital, regardless of the level of current net worth. Savings enhance the operational hedge offered by inventory, because they better conserve net worth when the commodity price is low. These predictions are confirmed in a sample of U.S. manufacturing corporations. We find that the empirical sensitivity of inventory investment to price changes is positive for any level of firms’ net worth. Savings and inventory are both positively related to financing constraints and cash-flow risk, but investment is more sensitive to inventory.Received November 13, 2017, Editorial decision September 25, 2018 by Editor Uday Rajan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Date: 2019
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