Abstract
SUMMARYWeak legal enforcement of contracts leads to inefficient breach and an overall increase in breaches for firms and individuals. We suggest that firms use inventory holdings as a means to counteract weak contract enforcement. We test the hypothesis that firms operating in weak legal environments have a higher ratio of inventories to net sales than firms operating in strong legal environments. Empirical evidence in support of the hypothesis using data from over three hundred comparable firms from fourteen product groups across thirty‐nine countries is presented.
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