Economic Policy Uncertainty And Corporate Inventory Investment: International Evidence
Abstract
Motivated by the significant impact of policy uncertainty on fixed capital
investment, but little is known about the comparable effect on short-term inventory
investment, this paper investigates the linkages between the latter component and
economic policy uncertainty. Using international data panels of manufacturing firms
from 28 countries, I empirically find that economic policy uncertainty negatively
signifies corporate inventory investment. Further analyses also show that external
finance dependence, financial constraints and market competition act as exacerbating
transmission channels of this relationship. Meanwhile, firms may experience inhibitory
effect through investment irreversibility, yet the results are not consistent when
different channel measures are employed. My research complements the scant literature
on the association between EPU and firms’ investment activities, providing evidence
that firms tradeoff between investing in inventories and holding cash to mitigate the
potential risks from policy uncertainty