The Impact of Inventory Stickiness on Bankruptcy Risk: Moderating Effects of Financial Constraints and Environmental Dynamism

Document Type : Research Paper

Authors

1 Associate Prof., Department of Accounting, Faculty of Economic Sciences and Administration, Qom University, Qom, Iran.

2 MSc. Student, Department of Accounting, Faculty of Economic Sciences and Administration, Qom University, Qom, Iran.

10.22059/acctgrev.2025.397530.1009125

Abstract

Objective
The purpose of this study is to provide empirical evidence on the stickiness of material and finished goods inventories in Iranian manufacturing firms during periods of revenue decline and to examine the effect of inventory stickiness on firms’ bankruptcy risk. Additionally, the study examines the moderating effects of financial constraints and environmental dynamism on the relationship between inventory stickiness and bankruptcy risk. Inventory stickiness can be a double-edged sword. On the one hand, holding excess inventory enables companies to better manage supply chain disruptions and problems; as a result, the confidence of businesses and firms increases, and companies become more self-sufficient. Excess inventory is also effective in maintaining production speed and stability in production and increases the probability and chance of survival of companies. On the other hand, inventory stickiness means high costs of maintaining excess inventory, which can lead to company failure. As a result of these costs, it is not far-fetched to expect a decrease in the profitability of companies. Therefore, the results of this research can help managers make optimal decisions in the field of inventory management in different environmental and financial conditions.
Methods
To test the research hypotheses, two samples were utilized. Initially, a sample comprising 388 firms (3,953 firm-years) was used to identify the presence of inventory stickiness. Subsequently, after applying specific filters—such as periods of declining sales revenue and firms facing bankruptcy risk—a refined sample of 288firms (670 firm-years) remained, which was used to test the main hypotheses. The statistical population consisted of manufacturing firms listed on the Tehran Stock Exchange and the Iranian over-the-counter (OTC) market from 2011 to 2023. Statistical analyses were conducted using Stata econometrics software and Microsoft Excel.
Results
The results confirm the presence of inventory stickiness among Iranian manufacturing firms. Furthermore, a U-shaped relationship between inventory stickiness and bankruptcy risk was identified, with the turning point occurring at a stickiness level of 2.388. The analysis also revealed that financial constraints positively moderate this U-shaped relationship, intensifying its effect, while environmental dynamism negatively moderates it, thereby weakening the relationship.
Conclusion
This study aimed to investigate the effect of inventory stickiness on bankruptcy risk in Iranian manufacturing firms. The effect of two variables, financial constraints and environmental dynamics, on this relationship was also examined as moderating variables. The results showed that there exists a nonlinear, U-shaped relationship between inventory stickiness and bankruptcy risk. This relationship suggests that maintaining inventory during periods of declining revenue can reduce bankruptcy risk up to a certain optimal level. However, deviation from this turning point increases the risk. The moderating effect of financial constraints indicates that the impact of inventory stickiness on bankruptcy risk is stronger in firms facing financial limitations. Also, maintaining higher inventory levels may serve as an effective strategy for sustaining production and operational continuity in dynamic environments.

Keywords

Main Subjects

References

 
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Accounting and Auditing Review
Volume 33, Issue 1
2026
Pages 52-86

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