Inventory Behavior and Financial Constraints : Theory and Evidence

Dasgupta, Sudipto and Li, Erica and Yan, Dong (2019) Inventory Behavior and Financial Constraints : Theory and Evidence. Review of Financial Studies, 32 (3). 1188–1233. ISSN 0893-9454

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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.

Item Type:
Journal Article
Journal or Publication Title:
Review of Financial Studies
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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, is available online at:
Uncontrolled Keywords:
?? financeeconomics and econometricsaccounting ??
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Deposited On:
06 Nov 2018 13:30
Last Modified:
16 Dec 2023 01:27