A panel data study on Spanish firms' inventory investment

This paper raises several questions about inventory investment of a sample of 172 big nonfinancial Spanish companies. Inventory investment has been usually explained by two alternative theories: the production smoothing model and the (S, s) model. First, we provide a descriptive analysis based on industry-level data to show some shortcomings of the first model. Then, we test a flexible accelerator model using firm-level data. The results seem to show that inventory investment, previous-period inventories and sales are closely and significantly related. This evidence, although not conclusive, rejects both the pure production smoothing model and the (S, s) model. At the same time, our results confirm the view of a target inventory level and the plausibility of the so-called stock-adjustment model, so that the optimal inventory holding buffers sales volatility.