The empirical relationship between UK net corporate borrowing and stockbuilding

The literatures on net corporate borrowing and stockbuilding by firms are both based on a simple linear-quadratic (L-Q) model, but they have been developed independently. This paper explores the possibility that a firm may jointly optimise its borrowing and stockbuilding decisions, where previous papers have imposed ‘decision rule decompositions’. The resulting model is estimated using UK corporate data and demonstrates that net corporate borrowing and stockbuilding are indeed used as substitutes in production smoothing.