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Inventory investment and the choice of financing: Does financial development play a role?

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  • Junhong Yang,
  • Alessandra Guariglia
  • Yuchao Peng
  • Yukun Shi

Abstract

Using a panel of 224,604 Chinese firms over the period 2004-2009, together with a set of unique city-level financial development data, we document a positive and significant association between both bank loans and trade credit and inventory investment. Furthermore, we find that in cities with relatively high (low) financial development, firms rely more on bank loans (trade credit) to finance their inventory investment. Finally, we show that the moderating effect played by financial development on the association between bank loans/trade credit and inventory investment is more pronounced for firms more likely to face financing constraints, namely privately-owned, small firms, with no political connections, located in coastal regions. Our results are robust to using a variety of different specifications and estimation methods.

Suggested Citation

  • Junhong Yang, & Alessandra Guariglia & Yuchao Peng & Yukun Shi, 2020. "Inventory investment and the choice of financing: Does financial development play a role?," Discussion Papers 2020-14, University of Nottingham, GEP.
    • Handle: RePEc:not:notgep:2020-14
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    More about this item

    Keywords

    Financing choice; Trade credit; Bank loans; Inventories; Financial development; Financing constraints;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G3 - Financial Economics - - Corporate Finance and Governance
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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