Working Papers

This study documents a novel working capital channel of investment under uncertainty, wherein uncertainty affects investment not through adjustment costs or irreversibility but through working capital and cash flows. The uncertainty comes from a prevalent supply chain phenomenon known as the bullwhip effect, where demand volatility is amplified upstream along the supply chain from retailers to raw materials suppliers. Analyzing a sample of over 154,000 supply chains, I find that a high bullwhip effect leads firms to increase their inventory levels, raising working capital demands and reducing cash available for investment, especially for financially constrained firms.This channel links the investment under uncertainty and investment-cash flow sensitivity literatures by showing how uncertainty can be transmitted through working capital and cash flow, ultimately impacting investment decisions. Additionally, this analysis is one of the first to link the well-known bullwhip effect to corporate finance and firms’ investment decisions.