INVENTORY INVESTMENT AND CASH FLOW SENSITIVITY: EVIDENCE FROM TURKISH FIRMS

Abstract

Purpose - This study analyzes the inventory investment – cash flow sensitivity for 166 manufacturing firms in Turkey listed in Borsa Istanbul. The time spans 2006-2018. Methodology - Based on the previous literature, Lovell’s (1961) target adjustment model is used. The baseline equation model is estimated by the system Generalized Method of Moments (GMM). Findings- The relationship between inventory investment and cash flow is statistically positive for constrained firms, while insignificant for unconstrained firms according to all models. The effect of Gross Domestic Product (GDP) on inventory investment is positive and significant for both constrained and unconstrained firms, this implies that GDP contributes to an increase in inventory investment. Conclusion- This study is the first one that analyzes the inventory investment and cash flow relationships for Turkish manufacturing firms and want to fulfill this gap in the literature. It is found that cash flow is positively significant for constrained firms according to size and age classification criteria.

Keywords

• Inventory management,cash flows,Turkey,GMM Model,financial constraints

References

1. Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29–51. https://doi.org/10.1016/0304-4076(94)01642-D
2. Arslan, Ö., Florackis, C., & Ozkan, A. (2006). The role of cash holdings in reducing investment-cash flow sensitivity: Evidence from a financial crisis period in an emerging market. Emerging Markets Review, 7(4), 320–338. https://doi.org/10.1016/j.ememar.2006.09.003
3. Bagliano, F. C., & Sembenelli, A. (2004). The cyclical behaviour of inventories: European cross-country evidence from the early 1990s recession. Applied Economics, 36(18), 2031–2044. https://doi.org/10.1080/0003684042000295601
4. Beck, T., Demirgüç-Kunt, A., Laeven, L., & Maksimovic, V. (2006). The determinants of financing obstacles. Journal of International Money and Finance, 25(6), 932–952. https://doi.org/10.1016/j.jimonfin.2006.07.005
5. Benito, A. (2005). Financial pressure, monetary policy effects and Inventories : Firm-level evidence from a market-based and a bank-based financial system. Economica, 72, 201–224.
6. Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143. https://doi.org/10.1016/S0304-4076(98)00009-8
7. Bo, H., Kuper, G., Lensink, R., & Sterken, E. (2002). Dutch inventory investment: Are capital market imperfections relevant? Applied Economics, 34, 15–22.
8. Carpenter, R. E., Fazzari, S. M., & Petersen, B. C. (1998). Financing constraints and inventory investment: A comparative study with high- frequency panel data. Review of Economics and Statistics, 80(4), 513–519.

9. Carpenter, R. E., Fazzari, S. M., Petersen, B. C., Kashyap, A. K., & Friedman, B. M. (1994). Inventory investment, internal finance fluctuations, and the business cycle. Brokings Papers on Economic Activity, 1994(2), 75–138.
10. Cunha, J. (2010). The financing constraint hypothesis and inventory investment decisions of firms, 1–20.
11. Cunningham, R. (2004). Finance constraints and inventory investment : Empirical tests with panel data (38 No. 2004). Ottawa.
12. Gertler, M., & Gilchrist, S. (1994). Monetary policy, business cycles, and the behavior of small manufacturing firms. Quarterly Journal of Economics, 109(2), 309–340.
13. Gilchrist, S., & Himmelberg, C. P. (1995). Evidence on the role of cash flow for investment. Journal of Monetary Economics, 36, 541–572. https://doi.org/10.1016/0304-3932(95)01223-0
14. Guariglia, A. (1999). The effects of financial constraints on inventory investment: Evidence from a panel of UK firms. Economica, 66(261), 43–62.
15. Guariglia, A. (2000). Inventory investment and capital market imperfections: A generalization of the linear quadratic inventory model. Oxford Bulletin of Economics and Statistics, 62(2), 223–243.
16. Guariglia, A., & Mateut, S. (2006). Credit channel , trade credit channel , and inventory investment : Evidence from a panel of UK firms. Journal of Banking & Finance, 30, 2835–2856. https://doi.org/10.1016/j.jbankfin.2005.11.002
17. Guariglia, A., & Mateut, S. (2010). Inventory investment, global engagement, and financial constraints in the UK: Evidence from micro data. Journal of Macroeconomics, 32, 239–250. https://doi.org/10.1016/j.jmacro.2009.03.001
18. Guizani, M. (2017). The financial determinants of corporate cash holdings in an oil rich country: Evidence from Kingdom of Saudi Arabia. Borsa Istanbul Review, 17(3), 133–143. https://doi.org/10.1016/j.bir.2017.05.003
19. Kashyap, A., Lamont, O. a, & Stein, J. C. (1994). Credit conditions and the cyclical behavior of inventories. The Quarterly Journal of Economics, 109(3), 565–592. https://doi.org/10.2307/2118414
20. Lovell, M. (1961). Manufacturers’ inventories, sales expectations, and the acceleration principle. Econometrica, 29(3), 293–314.
21. Roodman, D. (2009). Practitioners’ corner: A note on the theme of too many instruments. Oxford Bulletin of Economics and Statistics, 71(1), 135–158. https://doi.org/10.1111/j.1468-0084.2008.00542.x
22. Sangalli, I. (2013). Inventory investment and financial constraints in the Italian manufacturing industry: A panel data GMM approach. Research in Economics, 67(2), 157–178. https://doi.org/10.1016/j.rie.2013.02.003
23. Schiantarelli, F., & Sembenelli, A. (2000). Form of ownership and financial constraints: Panel data evidence from flow of funds and investment equations. Empirica, 27, 175–192. https://doi.org/10.1023/A:1026588619191
24. Shiau, H. L., Chang, Y. H., & Yang, Y. J. (2018). The cash holdings and corporate investment surrounding financial crisis: The cases of China and Taiwan. Chinese Economy, 51(2), 175–207. https://doi.org/10.1080/10971475.2018.1447833
25. Small, I. (2000). Inventory investment and cash flow (No. 112). London - Bank of England.
26. Tsoukalas, J. D. (2006). Financing constraints and firm inventory investment: A reexamination. Economics Letters, 90(2), 266–271. https://doi.org/10.1016/j.econlet.2005.08.012
27. Windmeijer, F. (2005). A finite sample correction for the variance of linear efficient two-step GMM estimators. Journal of Econometrics, 126(1), 25–51. https://doi.org/10.1016/j.jeconom.2004.02.005
28. Yang, J., Guariglia, A., Shi, Y., & Peng, Y. (2016). Inventory investment and the choice of financing in China: Does city-level financial development play a role?
29. Yue, F. (2011). Financial constraints and firms’ activities in China. Durham University