Аннотация:The objective of this paper is to analyse the linkage between internalfinance and inventory investment, using a large panel of UK manufacturing firms from 1968 to 1991. Firms are classified into two groups: those more and those less likely to face financial constraints. The estimates of several equations for inventory growth augmented with the coverage ratio indicate a significant effect of the latter on inventory investment for the former group, during periods of recession and tight monetary policy. This effect is particularly strong for work‐in‐process and raw material inventories which are characterized by low adjustment costs.
