Inventory holding and UK SMEs' performance

Abstract

This paper examines the relationship between inventory holding and firm performance for 141 small and medium-sized enterprises listed on the alternative investment market for an eight year period (2005 to 2012). Panel data regression analysis is used in the estimation of functions relating the inventory holding with measures of firm performance. The results provide empirical evidence which indicates the existence of an optimal inventory level that maximises performance. The results show that a concave relationship exists between inventory holding and performance. Furthermore, the paper determines whether or not deviations from the optimum inventory level reduce performance. The results indicate that deviations above or below the optimum inventory level decreases performance. Overall, the findings provide evidence that firms should strive to attain the optimal inventory level in order to maximise their performance.