The effects of financial constraints on inventory investment: Evidence from a panel of UK firms

The objective of this paper is to analyse the linkage between internal fina nce and inventory investment, using a large panel of UK manufacturing firms from 1968 to 1991. Firms are classified into two groups: those more and th ose less likely to face financial constraints. The estimates of several equ ations for inventory growth augmented with the coverage ratio indicate a si gnificant effect of the latter on inventory investment for the former group , during periods of recession and tight monetary policy. This effect is par ticularly strong for work-in-process and raw material inventories which are characterized by low adjustment costs.