Economic policy uncertainty and corporate inventory holdings: evidence from China. (1st July 2019)

• Record Type: Journal Article
• Authors: Zeng, Jianyu; Zhong, Teng; He, Fan
• Is Part Of: Accounting and finance. Volume 60:Number 2(2020)
• Page Start: 1727
• Page End: 1757
• Publication Date: 2019-07-01
• Subjects: Cash holdings -- Economic policy uncertainty -- Inventory holdings -- Performance; Accounting -- Periodicals; Finance -- Periodicals; 657.05
• DOI: 10.1111/acfi.12511
• Languages: English
• ISSNs: 0810-5391

Abstract

Abstract: We investigate the impact of economic policy uncertainty (EPU) on corporate inventory holdings in China over the period 2007–2017. We find that EPU leads firms to significantly reduce inventory holdings and this effect is particularly pronounced among non‐state‐owned enterprises. The adjustment of inventory holdings enhances firms' operating and market performance consequently. In addition, firms with greater financial constraints or stronger external governance are more affected by EPU. Further exploration shows that EPU induces high precautionary cash holdings, which crowds out inventories. Our results illustrate that firms reallocate between inventories and cash to cope with uncertainty associated with economic policy changes.