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Inventory and corporate risk management

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Bianco, Marco and Gamba, Andrea (2019) Inventory and corporate risk management. Review of Corporate Finance Studies, 8 (1). pp. 97-145. doi:10.1093/rcfs/cfy007

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Official URL: https://doi.org/10.1093/rcfs/cfy007

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Abstract

We examine the role of inventory in corporate risk management with a dynamic model of a firm exposed to costly external finance and featuring endogenous default. We find that inventory management allows net worth risk management irrespective of the level of current net worth, because it does not affect the trade off between external finance and risk management. We show that inventory and cash holdings are synergic tools: while the first is a valuable operational hedge against commodity price risk, the second enhances the hedge offered by inventory in the face of costly external finance. Using our model, we rationalize the empirical incidence of inventory and cash holdings in the cross-section of U.S. manufacturing corporations, showing that savings and storage of raw materials are both positively related to financing constraints and cash flow risk.

Item Type: Journal Article
Subjects: H Social Sciences > HD Industries. Land use. Labor
H Social Sciences > HF Commerce
Divisions: Faculty of Social Sciences > Warwick Business School > Finance Group
Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH): Primary commodities -- Mathematical models, Corporations
Journal or Publication Title: Review of Corporate Finance Studies
Publisher: Oxford University Press
ISSN: 2046-9128
Official Date: 1 March 2019
Dates:
DateEvent
1 March 2019Published
6 November 2018Available
25 September 2018Accepted
Volume: 8
Number: 1
Page Range: pp. 97-145
DOI: 10.1093/rcfs/cfy007
Status: Peer Reviewed
Publication Status: Published
Publisher Statement: This is a pre-copyedited, author-produced version of an article accepted for publication in Review of Corporate Finance Studies following peer review. The version of record available online at: Marco Bianco, Andrea Gamba; Inventory and Corporate Risk Management, The Review of Corporate Finance Studies, , cfy007, https://doi.org/10.1093/rcfs/cfy007
Access rights to Published version: Restricted or Subscription Access
RIOXX Funder/Project Grant:
Project/Grant IDRIOXX Funder NameFunder ID
Programma Marco PoloUniversità di Bolognahttp://dx.doi.org/10.13039/501100005969
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