The Financing Role of Inventory: Evidence from China’s Metal Industries

Classical inventory theory examines various factors on the matching of demand and supply. We find the model and empirical evidence for the financing role as an essential complementary factor. Theoretically, we analyze a model to show that inventory can be leveraged to obtain financial gains thus the optimal inventory level is associated with the investment opportunities. Empirically, we first show at the country-level, China’s inventory of copper, aluminum, and zinc are driven by the investment returns after controlling for other explanations, including price trajectory, currency risk, industrial demand, and economic uncertainty. Then we confirm the result at the firm-level using data from China’s manufacturing sector, and further establish the financing mechanism especially for the metal industries. The economic impact of the financing role is significant compared to the demand- or supply-side factors, suggesting that classical inventory theory should incorporate the financing role in making the optimal policy decision.