Inventory And The Stock Market

How does the stock market affect inventory decisions? The "Efficient markets" view is that low stock price means poor fundamentals, a higher cost of capital, and lower inventory. Normatively, firms should obtain their cost of capital from an efficient markets model of stock prices. The author's paper is motivated by the growing body of evidence that the stock market is not efficient and can temporarily mis-value firms. The author reports evidence that the market's "Behavioral" component explains firms' inventory as much as its "Fundamentals" component. The author further tests three possibilities for how the behavioral component works.