INVESTMENT IN INVENTORIES - AN EMPIRICAL MICROECONOMIC MODEL OF FIRM BEHAVIOR

Inventory investment is one part of a decision nexus addressed by the firm including physical investment, finance, and trade credit. The ana lysis presented in the paper makes this explicit, drawing on portfolio theory to model balance sheet items. The model is tested for samples of UK-quoted companies for the period 1960-85, and is shown to perform better than standard stock-adjustment equations. The equations indica te different behavioural responses between a sample of large growth-or iented companies and a sample of smaller stable companies. There is al so evidence that large company behavior changed in the turbulent econo mic conditions of the 1970s.