Volatility of sales, expectation errors, and inventory investment: Firm level evidence

This paper tests whether demand uncertainty, which is measured by the volatility of sales, affects inventory investment based on the accelerator buffer stock inventory model. Using a panel of Dutch listed firms in the period 1984-1996, we find that the estimated coefficient of the speed parameter of adjusting inventories increases vastly when the volatility of sales is used as the proxy for unexpected sales in the stock adjustment equation. Dutch firms on average overstate future sales, leading firms to accumulate inventories partially due to the concern of avoiding stock-out in case of highly unexpected demand. (C) 2001 Elsevier Science BY. All rights reserved.