A financial portfolio approach to inventory behaviour: Japan and the UK

Abstract The paper analyses the determinants of the inventory to assets ratio in panel data sets of Japanese and UK firms in the period 1960–1985. The analytical framework sets inventory decisions in the context of decisions by the firm about other assets and liabilities, in contrast to traditional models of inventories. Investment in inventories in Japan is found to be particularly related to sector specific inflation rates and expected sales, negatively to expected profits, and not much affected by interest rates. By contrast, UK inventories are generally positively related to profit rates, and respond to short term interest rates. Once other variables are taken into account, the coefficient on a time trend is positive for Japan (negative for Britain), which casts some doubt on the widely held view of Japanese innovation in inventory holding.

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