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The International Journal of Applied Economics and Finance

Year: 2013 | Volume: 7 | Issue: 1 | Page No.: 1-22
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Authors

D.M. Mathuva

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Research Article

Determinants of Corporate Inventory Holdings: Evidence from a Developing Country

D.M. Mathuva
Maximizing the return on corporate investment in inventories which represents a substantial proportion of the firm’s working capital is one key objective of a finance manager. This means that an optimal inventory level which maximizes the benefits and minimizes the costs of inventory holdings is important for firms to realize this objective. This study examines the firm-, time-, industry- and economy-level determinants of corporate inventory holdings. Data were collected from 341 firm-year observations (composed of a sample of 28 non-financial quoted firms) on the Nairobi Securities Exchange for the period 1996-2008. The data consisted of mainly financial data collected from annual financial reports of the 28 firms. The findings, which are robust for endogeneity, demonstrate that inventory holdings are influenced by the firm’s ability to generate internal resources (cash from operations), capital expenditure, firm’s growth opportunities, sales forecast volatility, net profit margin and the cash conversion cycle. The results provide limited evidence that firm size is a determinant of corporate inventory holdings. While firms maintain target (optimal) inventory levels, the study finds that this target varies with inventory supply and demand or usage. In conclusion, this study establishes that the determinants of corporate inventory holdings are primarily based on the firm’s efficiency, performance and sustainability position.
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