Has Inventory Investment Been Liquidity-Constrained? Evidence from U.S. Panel Data

Based on an analysis of quarterly panel data for U.S. firms, this paper finds that inventory investment has been liquidity-constrained in most periods during 1975-97, but less so, or not at all, during recessions. This result holds irrespective of whether the firm has a bond rating, contrary to the finding of Kashyap, Lamont, and Stein (1994) that inventory investment is not liquidity-constrained, except during recessions and only for firms without bond ratings. Our result can be justified on the grounds that inventory fluctuations are largely attributable to unexpected sales shocks during recessions, and that firms increase liquid assets before recessions