Oil price uncertainty and corporate inventory investment

Abstract

PurposeThis study examines the relationship between oil price uncertainty (OPU) and corporate inventory investments using a sample of 6,072 USA manufacturing firms from 1992 to 2019.Design/methodology/approachThe author's study employs a panel dataset to examine the relationship between OPU and corporate inventory investments. The author uses several alternative specifications such as fixed effects models, an instrumental variable analysis, an impact threshold for confounding variable (ITCV) analysis, alternative measures, additional control variables and the percent bias analysis to account for endogeneity issues.FindingsCorporate inventory investments decrease in response to high OPU. This decrease in inventory investments happens regardless of firms' expected stockout costs, information environment and reliance on external financing. As a potential mechanism, an uncertainty-induced increase in cash holdings contributes to this reduction in inventory investments. Also, the effect of OPU is non-linear and asymmetric. In response to the volatility of positive (negative) oil price changes, inventory investments decrease (increase) up to a certain point and increase (decrease) after that. Further, uncertainty-induced adjustments in inventory investments positively influence the operating performance of firms.Originality/valueThe author's study adds to the growing literature that examines the impact of OPU on corporate outcomes. Inventory investments directly affect business operations and could better reflect firms' responses to an uncertain environment.