J Supply Chain Manag - 2020 - Darby - The Implications of Firm Specific Policy Risk Policy Uncertainty and Industry

Journal of Supply Chain Management
2020, 56(4), 3–24

© 2020 Wiley Periodicals LLC
THE IMPLICATIONS OF FIRM-SPECIFIC POLICY RISK,

POLICY UNCERTAINTY, AND INDUSTRY FACTORS FOR
INVENTORY: A RESOURCE DEPENDENCE PERSPECTIVE
JESSICA L. DARBY AND DAVID J. KETCHEN JR.
Auburn University
BRENT D. WILLIAMS
University of Arkansas
TRAVIS TOKAR
Texas Christian University
The risk created by government policymaking can be daunting, but little

is known about the extent to which this risk is disruptive to business in
general and to supply chain operations in particular. Because government
is a powerful and omnipresent entity, scholars and executives alike could
benefit from greater understanding of how firms react to risk emanating
from the policymaking process. To help address this gap, we use resource
dependence theory to develop hypotheses concerning the accumulation of
inventory by firms to buffer against their exposure to potential policy
changes and how such a link might be moderated by macro-level and
industry-level factors. Data from 19,634 firm-year observations reveal that
firms accumulate more inventory as a buffer against policy risk under con-
ditions of high policy uncertainty and high industry dynamism. Overall,
our findings support the predictions of resource dependence theory and
refine understanding of supply chain responses to macro-level uncertainty
by demonstrating the contingent influence of government policy. In doing
so, our study provides a foundation for future research to explore the
intersections between government actions and supply chain activities and
offers insights for managers and policymakers about how to factor gov-
ernment into their decision calculi.
Keywords: supply chain strategy; policy and regulation; uncertainty; panel econo-
metrics; resource dependence theory; inventory
INTRODUCTION Sramek, Fugate, Miller, Germain, Izyumov & Krotov,

The U.S. team navigated a dynamic trade and inven- 2017). For example, government policymaking shapes
tory environment during the quarter. While no new divestitures (Blake & Moschieri, 2017), investment
material tariffs have been enacted on our products, (Julio & Yook, 2012), contracting (Bai, Sheng, & Li,
we did incur incremental expenses [by stockpiling 2016), and diversification (Xia, Ma, Lu, & Yiu, 2014).
inventory] to prepare for the potentiality of tariffs in Further, transportation research has illustrated how
the U.S. particular government policies, such as industry dereg-
—Chief Executive Officer Brian Goldner (Hasbro, ulation (e.g., Corsi, Grimm, & Feitler, 1992; Smith &
2019) Grimm, 1987) and the electronic logging device man-
date (Cantor, Corsi, & Grimm, 2009; Miller, Bolu-
Governments are a powerful external actor that firms mole, & Schweiterman, 2020) shape logistics activities
need to account for in their decision-making (Davis- and performance.
3
October 2020
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Examination of how risk surrounding government and customers, the government plays “a large role in
policymaking influences supply chain activities has determining the competitive landscape of an economy
been largely absent from this inquiry even though “ac- or industry” (Wry, Cobb, & Aldrich, 2013 p. 472). For
tions of national governments” (Manuj & Mentzer, example, a new trade treaty with a foreign government
2008 p. 138) and “changes in laws and policies” can facilitate the flow of certain resources between
(Wagner & Bode, 2008 p. 311) have been identified domestic and foreign firms and lower the costs of
as critical supply chain risk factors. To begin to such resources while the imposition of tariffs often
address this need, we focus on firm-specific policy risk dampens resource flows between domestic and foreign
(i.e., the extent to which a firm believes it will be firms (Hillman & Hitt, 1999). Government’s indirect
harmed by potential changes in policies and regula- role here is analogous to the role played by a faucet—
tions—Hassan, Hollander, van Lent, & Tahoun, a sink receives an amount of water based on both the
2019). Risk motivates firms to implement supply supply of water provided by a utility and the extent to
chain mitigation strategies as a buffer against the which a faucet is open or closed.
unknown (Bode, Wagner, Petersen, & Ellram, 2011). We leverage resource dependence theory to theorize
We build on this premise to examine how a funda- about the macro-level and industry-level conditions
mental supply chain buffering strategy—managing under which firms build up inventory as a buffer
inventory (e.g., Dooley, Yan, Mohan, & Gopalakrish- against harm by potential changes in policies and reg-
nan, 2010; Elking, Paraskevas, Grimm, Corsi, & Ste- ulations (i.e., firm-specific policy risk). At the macro-
ven, 2017)—is influenced by firm-specific policy risk. level, we examine the potential moderating effect of
Hasbro’s, 2019 actions described in our opening epi- policy uncertainty (i.e., a lack of clarity about the
gram provide a good illustration—the firm’s CEO future path of government policy—Baker, Bloom, &
described stockpiling inventory to guard against possi- Davis, 2016). Resource dependence theory suggests
ble tariffs “on [their] products.” In contrast, the CEO that policy uncertainty can destabilize operations
at Danaher Corporation, an industrial, healthcare, because access to critical resources is indirectly subject
and consumer products conglomerate, told investors to the ebbs and flows of government action (Pfeffer &
that his firm was taking a wait-and-see approach Salancik, 1978), yet little is known about the extent
because they “don’t feel that [they are] in the cross- to which this uncertainty is disruptive to supply chain
hairs of what [the Trump administration] is going operations.
after” (Danaher Corporation, 2018). At the industry level, we examine dynamism and
To better understand the firm-specific policy risk— munificence as potential moderators of the firm-speci-
inventory link, as well as unveil environmental condi- fic policy risk—inventory relationship. Dynamism cen-
tions under which firms are more likely to build up ters on variability and unpredictability of resource
inventory as a buffer, we look to resource dependence flows, and munificence centers on overall availability
theory. This theory centers on the premise that firms of resources in an industry (Dess & Beard, 1984).
must acquire certain inputs—such as raw materials, Understanding the moderating effects of different
human capital, and funds—in order to create products aspects of a firm’s industry is important because the
and services that customers are willing to purchase risk-reducing benefits of inventory depend on indus-
(Pfeffer & Salancik, 1978). Government can serve two try-level factors (Azadegan, Patel, Zangoueinezhad, &
main roles regarding these resource flows. First, the Linderman, 2013; Eroglu & Hofer, 2014; Pagell, New-
government can directly provide resources to firms, man, Hanna, & Krause, 2000). Indeed, resource
such as through direct cash transfers (e.g., corporate dependence theory suggests that dynamism creates
bailouts—Faccio, Masulis, & McConnell, 2006) and greater reliance on buffering strategies (Pfeffer &
government contracts (Eckerd & Girth, 2017; Harland, Salancik, 1978), whereas munificence attenuates firms’
Telgen, Callender, Grimm, & Patrucco, 2019). We do risk perceptions (Yasai-Ardekani, 1989). Such indus-
not examine this role given that past work provides try-level effects are of particular interest to policymak-
detailed treatment of the direct flow of resources from ers, as some industries rely more heavily on
government to firms (e.g., Eckerd & Girth, 2017; Har- government spending (Baker et al., 2016) or have
land et al., 2019). greater exposure to shifts in government policy (Al-
Instead, we focus on the second role wherein the Ubaydli & McLaughlin, 2017).
government can indirectly enhance or restrict the flow Using data from 2,451 firms from 2003 to 2017, we
of critical resources between firms through policies investigate (1) the direct effect of firm-specific policy
and regulations (Hillman, Zardhkoohi, & Bierman, risk on inventory, (2) the possible moderating effect
1999; North, 1990). This indirect role is the more of policy uncertainty, and (3) the possible moderating
common role of government within capitalist econo- effects of industry dynamism and industry munifi-
mies (Zheng, Singh, & Mitchell, 2015). By indirectly cence. The support we found for our predictions offers
influencing key resource providers, such as suppliers important insights for research, supply chain practice,
4 Volume 56, Number 4

Firm-Specific Policy Risk
and public policy. For scholars, our application of chain disruptions (Bode, Hubner, & Wagner, 2011)
resource dependence theory does not advance the the- and risk (Hajmohammad & Vachon, 2016), and
ory per se, but it does build understanding of how how dependence can affect lean inventory manage-
firms buffer against different varieties and levels of ment strategies and firm performance (Elking et al.,
uncertainty, including those created by government 2017).
policy (e.g., Flynn, Koufteros, & Lynn, 2016). In doing Whereas supply chain research has advanced under-
so, we address the goal of the Emerging Discourse standing of resource flows and uncertainty within the
Incubator to “move [policy] variables closer to the supply chain, we extend this logic to build knowledge
forefront of research” (Fugate, Pagell, & Flynn, 2018 involving uncertainty emanating from outside the
p. 89). This allows us to build on past work on the chain. In particular, we focus on government, which
effects of specific policy decisions (e.g., Cantor et al., is a uniquely potent actor in a firm’s environment
2009; Corsi et al., 1992; Miller et al., 2020; Smith & because of its exclusive ability to make rules governing
Grimm, 1987) by examining the more general effects production, distribution, and consumption of critical
of risk and uncertainty surrounding government poli- resources (Cohen, 2008). Government’s indirect influ-
cymaking. ence over resource flows derives from its “ability to
For managers, our findings highlight how their sup- make rules or otherwise regulate the possession, allo-
ply chain partners and competitors are likely to man- cation, and use of resources, and to enforce the regu-
age inventory within uncertain political environments. lations” (Pfeffer & Salancik, 1978 p. 49). Indeed,
Armed with knowledge that the extent to which firms Pfeffer and Salancik (1978 p. 48) emphasize that “it
build supply chain buffers by accumulating inventory is possible to regulate access to a resource without
varies with macro- and industry-level factors, man- owning it. Any process that affects the allocation of a
agers can adjust their strategies to improve coordina- resource provides some degree of control over it.” This
tion with supply chain partners and to take advantage creates uncertainty for firms because access to critical
of competitors’ moves. For policymakers, our findings resources is indirectly subject to changes in policies
illustrate how firms may react to risk and uncertainty and regulations (Pfeffer & Salancik, 1978). In devel-
emanating from the policymaking process. More gen- oped economies, there are thousands of policies and
erally, our findings also inform policymakers of the regulations under consideration at any given time
broader economic effects of uncertainty surrounding with new ones being added to the docket every day
their actions by illustrating the effects on supply chain (Hillman et al., 1999), so coping with policy risk and
operations. uncertainty is a proverbial “fact of life.”
Firm-Specific Policy Risk and Inventory

THEORETICAL BACKGROUND AND Figure 1 depicts our theoretical model. As shown,
HYPOTHESES our main effect hypothesis is that firm-specific policy
Thompson (1967) conceptualized organizations as risk—the extent to which a firm believes it will be
open systems that must take in resources from the harmed by changes in policies and regulations (Has-
environment, use those resources to create goods and san et al., 2019)—is positively related to inventory.
services, and then provide those offerings to cus- Here, we draw on Hassan et al.’s (2019 p. 2139)
tomers. Building on this premise, a number of organi- observation that the effect of government policymak-
zational theories arose to elaborate upon the ways ing “appears to play out at the level of the firm.” That
firms manage this process. Our focus is on Pfeffer and is, policies and regulations have differential impacts
Salancik’s (1978) resource dependence theory. This across industries, and even within industries, as imple-
theory relies on the premise that firms operate as mentation and enforcement may be highly localized
open systems and must transact with external entities (North, 1990). Policymakers and regulators vary in
to obtain needed inputs. Within supply chain man- their degree of implementation and enforcement (Lip-
agement research, resource dependence theory has sky, 1980) and changes in national, state, and local
been used to understand how firms manage relation- administrations create variation over time (Hassan
ships with suppliers and customers to reduce uncer- et al., 2019). Further, some firms face stronger reper-
tainty and improve the stability of input and output cussions from policies than others due to characteris-
flows (Crook & Combs, 2007). More specifically, tics such as firm size and actions such as lobbying
researchers have leveraged resource dependence the- and establishing political ties, (e.g., Beckman, Haun-
ory to illustrate how firms use power to foster trust schild, & Phillips, 2004; Hillman et al., 1999). As an
with supply chain partners (Ireland & Webb, 2007; example, consider the variation in fashion companies’
Ketchen & Hult, 2007), how firms manage supply exposure to policymaking surrounding international
October 2020 5
FIGURE 1
Conceptual Model
trade. In 2018, the U.S. Fashion Industry Association extra inventory allows firms to hedge against future
reported that all the companies who participated in loss of availability (e.g., Anand et al., 2008).
its survey faced risk because they sourced handbags, As a firm’s perceived risk increases, so does the like-
shoes, and apparel from China (Lu, 2018). Among lihood it will accumulate buffers to protect its opera-
fashion companies, analysts singled out Steve Mad- tions (Thompson, 1967). Indeed, supply chain risk
den, a midsize firm, as the “one with the most to management research suggests that firms are more
lose” because more than ninety percent of its products likely to pursue mitigation strategies under conditions
were made in China (Wolf, 2018). of high risk (Cantor, Blackhurst, & Cortes, 2014). For
Policy risk motivates firms to implement risk mitiga- example, DuHadway et al. (2018) found that high
tion strategies intended to insulate them from poten- levels of communicated risk were associated with
tially harmful government actions (Bode et al., 2011). higher levels of safety stock. We thus expect that firms
However, government is one of the most challenging facing higher policy risk will hold more inventory
externalities to predict because of the heterogeneous than firms with lower policy risk. Stated formally:
interests of various policymakers (Aharoni, Maimon,
H1: Firm-specific policy risk is positively asso-
& Segev, 1981). As a result, we expect firms will turn
ciated with inventory.
to other means to reduce their vulnerability to policy-
making, such as building inventory. Accumulating
inventory allows firms to maintain access to critical Moderators of the Firm-Specific Policy Risk–
resources in the short-term in order to reduce their Inventory Relationship
vulnerability to policy changes, but it does not resolve While we expect that firms will rely on buffering
the root issue (Pfeffer & Salancik, 1978). In this sense, strategies to hedge against policy risk at the firm-level,
inventory serves as a buffer that temporarily insulates supply chain risk management research suggests that
firms (Bourgeois, 1981) and allows them to continue the confluence of perceived risk and uncertainty may
operating even when the continued availability of crit- also have an effect (Cantor et al., 2014). Policy uncer-
ical resources is in question (Anand, Anupindi, & Bas- tainty—a lack of clarity about the future path of gov-
sok, 2008). This is in line with supply chain risk ernment policy—Baker et al. (2016)—is a factor that
management research suggesting the use of buffer can destabilize firm operations (Hult, Craighead, &
inventory as a risk mitigation strategy (e.g., Chopra & Ketchen, 2010) because access to critical resources is
Sodhi, 2004; Kull & Closs, 2008; Talluri, Kull, Yildiz, indirectly subject to the ebbs and flows of government
& Yoon, 2013). Underlying inventory-based action. When firms face heightened policy uncertainty,
approaches to risk mitigation is the idea that holding resource dependence theory suggests that they will

take additional actions to guard their operations (Pfef- munificence) on the firm-specific policy risk–inventory
fer & Salancik, 1978). As such, we posit that policy relationship. Industry dynamism centers on variabil-
uncertainty magnifies the firm-specific policy risk– ity, instability, and turbulence; it is the rate and
inventory relationship. unpredictability of changes in the industry (Dess &
Under conditions of high policy uncertainty, there Beard, 1984). Resource dependence theory suggests
is increased potential for policy changes that could that higher levels of dynamism create greater reliance
indirectly dampen the availability of critical resources on buffering strategies (Pfeffer & Salancik, 1978)
(Harland et al., 2019). Policy uncertainty thus mag- because “firms may do more to protect themselves” in
nifies firms’ vulnerability to government action unstable environments (Pagell & Krause, 2004 p.
because there are numerous policies and regulations 634). That is, the unpredictability of resource flows in
that could negatively impact their operations (Tokar dynamic environments requires more buffers to
& Swink, 2019). Recent examples of the many poli- ensure continued access to critical resources than
cies and regulations under consideration at any given would be required in more stable settings.
time include trade negotiations (e.g., Coates, 2018), This is also in line with supply chain research sug-
the electronic logging device mandate (e.g., Miller gesting that greater levels of dynamism “translate into
et al., 2020), emissions requirements (Laarson & greater inventory requirements” (Eroglu & Hofer,
Kamal, 2019), and drone regulations (Laarson & 2014 p. 349). As an example, consider firms operating
Kamal, 2019). To reduce this vulnerability, we expect in the dynamic consumer electronics industry (Wien-
that firms will build up inventory to a greater extent. garten, Pagell, & Fynes, 2011). Apple increased its
In contrast, firms’ operations are less vulnerable to inventory from $4.4 billion in 2017s fourth quarter to
government action under conditions of low policy $7.6 billion in 2018s first quarter in response to its
uncertainty. We thus expect that firms will be less trade-related policy risk; the increase in inventory was
inclined to accumulate inventory because there are cited as a “defensive/protective measure in case there
fewer potential threats to resource flows. Stated are difficulties in future procurement or supply chain
formally: disruption” (Kharpal, 2018). In contrast, firms operat-
ing in less dynamic industries enjoy more predictable
H2: Policy uncertainty strengthens the positive
resource flows (Berman, Phillips, & Wicks, 2005) and
relationship between firm-specific policy risk
are less likely to feel compelled to accumulate inven-
and inventory. Specifically, the relationship
tory to buffer against policy risk. We thus posit that
will be stronger under conditions of high pol-
dynamism magnifies the firm-specific policy risk–
icy uncertainty than it will be under condi-
inventory relationship. Stated formally:
tions of low policy uncertainty.
H3: Industry dynamism strengthens the positive
Industry-level factors may also impact the extent
relationship between firm-specific policy risk
to which firms build up inventory to buffer against
and inventory. Specifically, the relationship
firm-specific policy risk. Indeed, supply chain scho-
will be stronger for firms operating in more
lars argue that the risk-reducing benefits of inven-
dynamic industries than it will be for firms
tory depend on industry-level factors (Azadegan
operating in less dynamic industries.
et al., 2013; Eroglu & Hofer, 2014; Pagell et al.,
2000). Further, economists and political scientists Industry munificence refers to the overall “scarcity
suggest that policies have differential impacts across or abundance of critical resources needed by (one or
industries. Some industries rely more heavily on more) firms” operating within an industry environ-
government spending (Baker et al., 2016) or have ment (Castrogiovanni, 1991 p. 542). Resource depen-
greater exposure to shifts in regulatory policy (Al- dence theory suggests that the availability of resources
Ubaydli & McLaughlin, 2017) whereas other indus- in the environment influences firms’ potential for sur-
tries are sheltered from particular policies and regu- vival (Pfeffer & Salancik, 1978). It is easier for firms
latory changes. As an example, consider the to survive and prosper in environments with abun-
variation in industries’ exposure to uncertainty sur- dant resources relative to environments with scarce
rounding trade policy in the late 2010s. Initial tar- resources. We thus posit that munificence attenuates
iffs on steel and aluminum impacted firms in the firm-specific policy risk–inventory relationship.
construction, appliance manufacturing, and metal High munificence creates “greater certainty for the
manufacturing, whereas subsequent tariffs impacted firm in procuring the necessary inputs” (Berman, Phil-
manufacturers of electronics and other consumer lips, & Wicks, 2005 p. 3). Because resources are read-
products. ily available in highly munificent industries, firms
We theorize about the potential moderating effects operating in these settings should be less likely to
of two industry-level factors (dynamism and accumulate inventory as a buffer against policy risk.
October 2020 7
In contrast, less munificent industries are characterized is based on the dependent variable, sample selection
by a “lack of maneuverability” (Shepherd, Patzelt, & bias can occur (Wooldridge, 2009). Following stan-
Baron, 2013 p. 1256), so firms have fewer alternatives dard practice (e.g., Heckman, 1979), we tested for
to access critical resources. This scarcity magnifies the this bias by comparing our final data set with the
importance of taking actions that ensure continued original data set. Using the original data set, we cre-
access to resources. Further, research suggests that ated a dummy variable that was coded as one if the
actors assign greater weights to risk under conditions firm-year observation was included in our final data
of low munificence (Shepherd, et al., 2013). That is, set and zero if it was not (Kim & Zhu, 2018). We
scarcity heightens firms’ perceived risk because it then estimated a probit model with the dummy
threatens their continued viability (Yasai-Ardekani, variable as the dependent variable and our firm-level
1989). Firms operating under low munificence thus variable of interest—firm-specific policy risk—and
are likely to accumulate more inventory to buffer firm-level control variables as the independent vari-
against policy risk. Stated formally: ables. The results indicated that the firms included
in our sample tend to have higher sales (p < .01)
H4: Industry munificence weakens the positive
and fewer employees (p < .01) than the firms
relationship between firm-specific policy
excluded from our sample. However, the firms
risk and inventory. Specifically, the relation-
included in our sample do not differ significantly
ship will be weaker for firms operating in
from those excluded from our sample in terms of
more munificent industries than it will be for
gross margin (p > .10) or, importantly, firm-specific
firms operating in less munificent industries.
policy risk (p > .10).
A comparison of the data sets also indicated that
our sample is less representative of information,
METHODOLOGY
finance, and real estate industries (NAICS 51-53) and
Data and Measures more representative of manufacturing industries
To test our hypotheses, we compiled data from (NAICS 31-33) than the original COMPUSTAT sam-
the COMPUSTAT Fundamentals Annual database, ple. Two notable differences were the representation
the Economic Uncertainty database (Baker et al., of NAICS 525 (“funds, trusts, and other financial
2016), the Federal Reserve’s Economic Research vehicles”) and NAICS 334 (“computer and electronic
Database (FRED), and the Bureau of Economic Ana- product manufacturing”). Our sample underrepresents
lysis. Firm-level financial data were acquired from NAICS 525 (0.01% of our sample versus 16.12% of
the COMPUSTAT Fundamentals Annual database on the original sample) and overrepresents NAICS 334
U.S. publicly traded firms and were matched with (15.07% of our sample versus 8.16% of the original
firm-specific policy risk data from the Economic sample). The industry representation makes sense
Uncertainty database based on firms’ GVKey—a given our focus on inventory, but it is a limitation
unique identifier assigned to each company in that we explore further in our Discussion section.
COMPUSTAT. Only active firms that reported posi- Importantly, however, our sample of firms does not
tive, nonzero figures for inventory, sales, and num- differ from the broader COMPUSTAT sample in terms
ber of employees and had consistently available of our firm-level variable of interest–firm-specific pol-
measures of firm-specific policy risk were retained icy risk.
for the analysis. The firm-level data were then Firm-Specific Policy Risk. We used the quarterly
matched with policy uncertainty data from FRED PRisk Index developed by Hassan et al. (2019) to
based on year and with industry-level data from the measure firm-specific policy risk (Policy Riskit). For
Bureau of Economic Analysis based on firms’ NAICS each firm i in year t, the PRisk Index was aggregated
codes as listed in COMPUSTAT. Our sample to the annual level by calculating the arithmetic aver-
includes firms in a broad cross-section of industries, age across the four quarters in each fiscal year t then
but the majority (61%) of our sample is in the taking the natural logarithm. These data are available
manufacturing (NAICS 31-33), wholesale (NAICS through the Economic Uncertainty (Baker et al.,
42), and retail (NAICS 44-45) industries given our 2016) and Firm-Level Risk (Hassan et al., 2019) data-
focus on inventory. The final data set includes bases.
2,451 firms in 78 different industries (as defined by The PRisk Index is based on transcripts from quar-
three-digit NAICS codes) across 2003 to 2017 and terly earnings conference calls, which are available
contains 19,634 firm-year observations. from Thomson Reuters’ Street Events (Hassan et al.,
Most of the firm-year observations were dropped 2019). Quarterly earnings conference calls are
from the original data set because they had blank, forums through which shareholders and other inter-
negative, or zero inventory figures. When selection ested parties can ask questions about potential

opportunities and threats facing the firm (e.g., Hol- including uncertainties related to the economic
lander, Pronk, & Roelofsen, 2010). Sequence-based ramifications of ‘noneconomic’ policy matters”
pattern classification methods developed in computa- (Baker et al., 2016 p. 1598). We aggregated the
tional linguistics (Schutze, Manning, & Raghavan, BBD Index to the annual level by calculating the
2008; Song & Wu, 2009) were used to identify the arithmetic average across the twelve months in each
extent to which each quarterly earnings conference fiscal year then taking the natural logarithm. The
call focused on policy risk (Hassan et al., 2019). To data were obtained from FRED.
determine the share of conversation focused on pol- The BBD Index has been used a proxy for policy
icy risk, a training library of political texts (e.g., poli- uncertainty in top journals in other disciplines,
tical science textbooks, speech transcripts from including management science (e.g., Brogaard & Det-
politicians) was used to identify bigrams, or two- zel, 2015), macroeconomics (e.g., Fernandez-Villa-
word combinations, that are “political in nature. . . verde, Guerr on-Quintana, Kuester, & Rubio-Ramırez,
or indicative of a specific political topic” (Hassan 2015), and finance (e.g., Bonaime, Gulen, & Ion,
et al., 2019, p. 2147). The total number of instances 2018). The BBD Index has also withstood extensive
in which these bigrams were used in combination checks, including a detailed human audit (Baker
with or in proximity to (within ten words) syno- et al., 2016), and has been shown to correlate as
nyms for “risk” or “uncertainty” in the conference expected with other measures of economic uncertainty
call were counted (Hassan et al., 2019). This count (e.g., implied stock market volatility) and events
was then weighted by its term frequency and divided anticipated to generate policy uncertainty (Bonaime
by the length of the quarterly earnings conference et al., 2018). Further, in contrast to other proxies for
call to create the PRisk Index (Hassan et al., 2019). policy uncertainty that are based largely on election
The use of quarterly earnings conference calls to cycles (e.g., Julio & Yook, 2012), the BBD Index also
measure firm-specific policy risk allows us to under- accounts for policy uncertainty unrelated to elections
stand firm perceptions of risks related to government and/or outside of election years. Consequently, the
policy, which may differ from actual risk (Hassan BBD Index has also been adopted as a proxy for pol-
et al., 2019) but nonetheless determine firm icy uncertainty by the Federal Reserve and various
responses (Ellis, Shockley, & Henry, 2011; Pagell & organizations, such as Bloomberg and Reuters (Baker
Krause, 2004). et al., 2016).
The PRisk Index has been used as a proxy for Industry-Level Factors: Munificence and Dynamism.
firm-specific policy risk in other disciplines, includ- In line with previous research (Boyd, 1995; Dess &
ing accounting (Nagar, Schoenfeld, & Wellman, Beard, 1984), munificence (Munificenceit Þ, and dyna-
2018), finance (Hankins, Stone, Cheng, & Chiu, mism (Dynamismit Þ were calculated by regressing the
2020), and macroeconomics (Bloom et al., 2018). value of each industry’s sales or receipts on time.
The PRisk Index has been shown to correlate as Munificence reflects the abundance of resources in the
expected with firm-level stock market volatility and industry and was calculated as the slope coefficient
firm-level actions, such as reductions in hiring and from this regression divided by the mean value (Boyd,
investment, active lobbying, and donations to politi- 1995). Dynamism reflects instability and unpre-
cians, in a manner that is consistent with expected dictability in the industry and was calculated as the
reactions to perceived policy risk (Hassan et al., standard error of the slope coefficient from this regres-
2019). Further, the PRisk Index has been shown to sion divided by the mean value (Boyd, 1995). To
provide information beyond that captured by time adapt the measures to the panel structure of our data,
and industry fixed effects (Hassan et al., 2019). we used a rolling five-year window, and the regression
Policy Uncertainty. We used the monthly Eco- for any given year is based on the five preceding years
nomic Policy Uncertainty Index developed by Baker, (e.g., the estimate for 2017 is based on data from
Bloom, and Davis (2016)—BBD Index hereafter—to 2013 to 2017). Likewise, the mean value for any given
measure policy uncertainty (Policy Uncertaintyt). The year is based on the rolling five-year average of the
BBD Index is a monthly weighted average of four value of the sales or receipts. Seasonally adjusted data
components: The frequency of articles related to for the value of each industry’s sales or receipts (i.e.,
policy uncertainty published in the ten leading U.S. “real gross output”) from 1997 to 2017 were acquired
newspapers, proposed tax code changes, forecast dis- from the Bureau of Economic Analysis and measured
agreement regarding monetary policy, and forecast in billions of 2012 chained dollars; that is, the data
disagreement regarding fiscal policy. In total, the have been adjusted to remove the effects of inflation
measure captures “uncertainty about who will make and allow for comparison across years (Bureau of Eco-
economic policy decisions, what economic policy nomic Analysis, 2019). The measures were calculated
actions will be undertaken and when, and the eco- for each industry (as defined by three-digit NAICS
nomic effects of policy actions (or inaction)— codes) and were matched to each firm i in each year t.
October 2020 9
Inventory. To measure inventory, extant research gross margins are traded off by firms (Gaur et al.,
has used various estimates, including absolute 2005). For firm i in year t, gross margin was calculated
estimates, such as average inventory or total as:
inventory, and standardized estimates, such as
Salesit COGSit
inventory turnover or the inventory-to-sales ratio Marginit ¼
Salesit
(King & Lenox, 2001; Schonberger, 2007). While
each measure has strengths and limitations (Ero-
where Salesit is firm i’s sales in year t and COGSit is
glu & Hofer, 2011), we use inventory turnover
because it has been used as a measure for both firm i’s cost of goods sold in year t.
Building inventory is not the only strategy available
inventory and operational slack (Wiengarten, Fan,
to manage vulnerability to government actions.
Lo, & Pagell, 2017), which are both forms of
supply chain buffers (e.g., Bourgeois, 1981). We Resource dependence theory suggests that firms can
also enact cooptation strategies and establish linkages
calculated inventory turnover as:
with powerful government actors to mitigate policy
risk (Hillman, Keim, & Schuler, 2004; Pfeffer &
COGSit
Inventoryit ¼ ð1Þ ln Salancik, 1978). For example, firms can shape poli-
Avg Inventoryit
cies and regulations by forming connections with
policymakers, contributing to campaigns, and actively
where COGSit is firm i’s cost of goods sold in year t lobbying (e.g., Bonardi & Keim, 2005; Hillman &
and Avg Inventoryit is the average of firm i’s total Keim, 1995; Hillman et al., 2004). Research has
inventory reported at the end of fiscal years t 1 shown that large firms are more likely to possess the
and t. GAAP allows for last in, first out (LIFO) and resources and infrastructure necessary to establish co-
first in, first out (FIFO) inventory valuation. While optive linkages with government actors (Macher &
most firms use FIFO, COMPUSTAT reports a mea- Mayo, 2015), so we also included firm size as a con-
sure known as LIFO reserve for firms that use LIFO. trol variable. In line with previous research (e.g.,
LIFO reserve was added to total inventory to stan- Paulraj, 2011), we used the natural logarithm of the
dardize total inventory across all firms. In line with number of employees (in thousands) as a proxy for
previous research, average inventory was used to firm size. There are several other measures that have
account for systematic changes year over year (e.g., been used as proxies for firm size, such as sales and
Davis-Sramek et al., 2017). All else being equal, total assets, but we use these financial measures as
inventory turnover decreases as more inventory is control variables and/or to standardize our dependent
held as a buffer. Thus, for ease of interpretation, we variables.
reversed the measure for the analysis (e.g., Wien- At the macro-level, we also included the Volatility
garten et al., 2017). (VIX) Index as a control (VIX t Þ, which measures the
Control Variables. Firm-level variables that have 30-day implied volatility of the stock market based
been shown to affect inventory were included as con- on the S&P 500 Index and is available through the
trols. First, in line with previous research (Gaur, Chicago Board Options Exchange. The VIX Index is
Fisher, & Raman, 2005), the natural logarithm of widely accepted in practice as a measure of per-
Salesit was included to control for demand. Second, ceived market volatility and is the most commonly
capital intensity was controlled for by including a used empirical proxy for overall macroeconomic
measure for the proportion of assets that are fixed; uncertainty (e.g., Bloom, 2014). Controlling for
extant research has shown that firms with greater capi- overall macroeconomic uncertainty allows us to fur-
tal investments may be better able to manage inven- ther isolate the effect of policy uncertainty. Follow-
tory (Cachon & Fisher, 2000; Gaur et al., 2005). In ing standard practice, the daily VIX Index was
line with Gaur et al. (2005), we calculated capital aggregated to the annual level by calculating the
intensity for firm i in year t as: arithmetic average of the daily index across all active
trading days in each year t then taking the natural
Net Fixed Assetsit logarithm. Table 1 provides descriptive statistics and
Capital Intensityit ¼
Net Fixed Assetsit þ Total Inventoriesit bivariate correlations.
where Total Inventoriesit is firm i’s total inventory in

year t and Net Fixed Assetsit is firm i’s gross fixed assets, MODEL ESTIMATION AND RESULTS
comprised of land, property, and equipment, less Our panel data set consists of many firms measured
accumulated depreciation in year t. repeatedly on multiple variables across time; this
Third, we included gross margin as a control variable structure violates ordinary least squares (OLS) regres-
because research has shown that inventory levels and sion’s independence assumption (McNeish & Kelley,

2019). We thus accommodated the panel structure
0.025*
(9) of our data by testing our hypotheses using mixed
effects models—also known as multilevel models
(Bell & Jones, 2015; Miller, Ganster, & Griffis,
2018). While fixed effects modeling has traditionally
0.268*
0.007
been considered the “gold standard” for analyzing
panel data, it is limited to capturing changes that
(8)
occur within firms over time (e.g., Certo, Withers, &

Semadeni, 2017). To overcome this limitation,
0.246*
0.257*
0.638*
scholars have developed a “hybrid” approach that
separates the within and between effects in panel
(7)
data (e.g., Bell & Jones, 2015; McNeish & Kelley,

2019). The hybrid approach appears to perform as
0.123*
0.024*
0.026*
0.107*
well as fixed effects models “with respect to estimat-
ing coefficients in the presence of endogeneity due
(6)
to omitted variables” (McNeish & Kelley, 2019 p.

31) and to outperform fixed effects models in the
0.050*
0.026*
0.017*
0.021*
presence of unbalanced panels (Bell & Jones, 2015).

0.014
Moreover, performing a Hausman (1978) test

(5)
(v2 = 492.69, p < .01) on our data indicated that

Descriptive Statistics and Correlation Matrix
we should reject the null hypothesis that there are

0.030*
no differences between within and between effects.

0.011
0.001
0.004
0.005
0.003
As Bell and Jones (2015 p. 144) point out: “The

(4)
Hausman test is not a test of fixed effects versus

random effects; it is a test of the similarity of
within and between effects.” We thus use the hybrid
0.212*
0.057*
0.017*
0.052*
0.108*
0.001
0.013
approach to disentangle within- and between-firm

TABLE 1
effects.
(3)
Separating the within and between effects is also

critical for theoretical development (e.g., Certo
0.191*
0.062*
0.901*
0.021*
0.035*
0.023*
0.031*
0.025*
et al., 2017; Miller et al., 2018). For example, a

within-firm interpretation of H1 suggests that a firm
(2)
whose policy risk has increased will build up inven-

tory to a greater extent than it has in the past. This
0.141*
0.572*
0.034*
0.130*
0.018*
0.075*
0.145*
0.005
0.005
is consistent with the contention that firms continu-

ously monitor and adapt to changes in their envi-
(1)
ronments over time (Thompson, 1967). In contrast,

a between-firm interpretation of H1 suggests that
1.319
0.903
0.269
2.021
1.034
0.278
0.003
0.041
0.290
10.484
firms with higher policy risk will build up inventory

to a greater extent than firms with lower policy risk.
SD
This is consistent with the contention that differ-

ences across firms arise from differences in their
1.917
3.162
0.642
0.242
1.489
4.271
4.742
0.003
0.012
2.913
environments. Our theorizing for H1, H2, H3, and

Mean
H4 centers on between-firm interpretation and using

the hybrid approach allows us to examine the
between-firm effects while controlling for within-firm
Policy Uncertaintyt
effects to address endogeneity concerns. Moreover,

Capital Intensityit
the intraclass correlation coefficients (ICCs) of

Munificenceit
0.865, 0.813, and 0.818 (see Table 2) indicate that

Policy Riskit
Dynamismit
Inventoryit
Firm Sizeit
a significant percentage of overall variance—more

Marginit
than 80%—is explained by between-firm variability

Salesit
(Certo et al., 2017), and a likelihood-ratio test indi-

VIXt
cated that there is enough variability between firms

*p < .05
to favor a mixed-effects model over a standard

(10)
model (v2 = 20,519.40; p < .0001).

(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
October 2020 11
Our estimation procedure had three steps. First, in Level 2:

Model (1), we estimated a baseline model that
b0i ¼ b0 þ b1 Sales BWi þ b2 Capital Intensity BWi
includes the within and between effects of our firm-
þ b3 Margin BWi þ b4 Firm Size BWi þ u0i
level control variables. Following standard practice
(e.g., Bell & Jones, 2015; Schunck, 2013), the
between-firm effects (denoted as BW) were estimated Reduced Form:
as the firm-specific mean ( Xi Þ, and within-firm effects Inventoryit ¼ b0 þ b1 Sales BWi þ b2 Capital Intensity BWi
(denoted as WI) were estimated as the deviation from
þ b3 Margin BWi þ b4 Firm Size BWi þ u0i
the firm-specific mean (X it Xi Þ. Model (1) was speci-
fied as: þ b1i Sales WIit þ b2i Capital Intensity WIit
Level 1: þ b3i Margin WIit þ b4i Firm Size WIit þ eit
In Model (2), we added firm-specific policy risk
Inventoryit ¼ b0i þ b1i Sales WIit to test Hypothesis 1, as well as policy uncer-
þ b2i Capital Intensity WIit tainty, dynamism, munificence, VIX index, and
þ b3i Margin WIit þ b4i Firm Size WIit þ eit industry dummies at the three-digit NAICS level,
to isolate its effect on inventory. Model (2) was
specified as:
TABLE 2
Hybrid Model Results for Inventoryit
(1) (2) (3)
Dependent Variable: Invetoryit

Fixed Effects
Intercept 0.284 (.681) -0.163 (.697) 0.434 (.698)
Sales BWi 0.291*** (.058) 0.290*** (.059) 0.280*** (.059)
Sales WIit 0.526*** (.030) 0.631*** (.030) 0.753*** (.032)
Capital Intensity BWi 2.571*** (.100) 2.577*** (.100) 2.596*** (.100)
Capital Intensity WIit 2.290*** (.043) 2.247*** (.043) 2.292*** (.043)
Margin BWi 0.009*** (.002) 0.009*** (.002) 0.009*** (.002)
Margin WIit 0.004*** (.000) 0.004*** (.000) 0.004*** (.000)
Firm Size BWi 0.137** (.027) 0.138*** (.027) 0.138*** (.027)
Firm Size WIit 0.280*** (.015) 0.292*** (.015) 0.295*** (.015)
Policy Risk BWi 0.048* (.030) 0.458*** (.091)
Policy Risk WIit 0.003 (.004) 0.003 (.004)
PolicyUncertaintyt 0.284*** (.019)
Dynamismit 14.128** (1.760) 4.095** (1.952)
Munificenceit 0.046 (.121) 0.652*** (0.128)
VIXt 0.221*** (.017)
Policy Risk BWi x Policy Uncertaintyt 0.075*** (.018)
Policy Risk BWi x Dynamismit 1.468*** (.379)
Policy Risk BWi x Munificenceit 0.054 (.329)
Random Effects (Variance Components)
Intercept 0.818 0.822 0.824
Residual 0.192 0.189 0.183
Industry Dummies Included Included
Time Fixed Effects Included
-Log Likelihood 15,769 15,558 15,310
v2 Statistic 6,093*** 6,634*** 6,963***
Intraclass Correlation 0.810 0.813 0.818
Firm-Year Observations 19,634 19,634 19,634
Observed Information Likelihood (OIC) standard errors are reported in parentheses.

*p < .10
**p < .05
***p < .01

Level 1: Level 2:
Inventoryit ¼ b0i þb1i Sales WIit þb2i Capital Intensity WIit b0i ¼ b0 þ b1 Sales BWi þ b2 Capital Intensity BWi
þb4i Firm Size WIit þ b3 Margin BWi þ b4 Firm Size BWi
þb5i Policy Risk WIit þ b5 Policy Risk BWi þ u0i
þb6i Policy Uncertaintyt
b6i ¼ b6 þ c1 Policy Risk BWi
þb7i Dynamismit þb8i Munificenceit
X
87 b7i ¼ b7 þ w1 Policy Risk BWi
þb9i VIXt þ bji Industryit þeit
j¼10 b8i ¼ b8 þ u1 Policy Risk BWi
Reduced Form:
Level 2:
Inventoryit ¼b0 þb1 Sales BWi þb2 CapitalIntensity BWi
b0i ¼ b0 þ b1 Sales BWi þ b2 Capital Intensity BWi
þb3 Margin BWi þb4 FirmSize BWi
þ b3 Margin BWi þ b4 Firm Size BWi
þb5 Policy Risk BWi þu0i þb1i Sales WIit
þ b5 Policy Risk BWi þ u0i
þb2i CapitalIntensity WIit þb3i Margin WIit
Reduced Form: þb4i FirmSize WIit þb5i Policy Risk WIit
þ ðb6 þc1 Policy Risk BWi ÞPolicy Uncertaintyt
Inventoryit ¼ b0 þb1 Sales BWi þb2 Capital Intensity BWi
þðb7 þw1 Policy Risk BWi Dynamismit
þb3 Margin BWi þb4 Firm Size BWi
þ ðb8 þu1 PolicyRisk BWi ÞMunificenceit
þb5 Policy Risk BWi þu0i þb1i Sales WIit
X
87 X
97
þb2i Capital Intensity WIit þb3i Margin WIit þb9i VIXt þ bji Industryit þ bki Yeart þeit
þb4i Firm Size WIit þb5i Policy Risk WIit j¼10 k¼83
þb6i Policy Uncertaintyt þb7i Dynamismit ¼b0 þb1 Sales BWi þb2 CapitalIntensity BWi
þb8i Munificenceit þb9i VIXt þb3 Margin BWi þb4 FirmSize BWi
X
87 þb5 Policy Risk BWi þu0i þb1i Sales WIit
þ bji Industryit þeit þb2i CapitalIntensity WIit þb3i Margin WIit
j¼10
þb4i FirmSize WIit þb5i Policy Risk WIit
þb6 Policy Uncertaintyt
where the index i denotes the firm and corresponds to
þc1 Policy Risk BWi x Policy Uncertaintyt
2,451 publicly traded firms in the United States; the
index t denotes the measurement occasion and corre- þb7 Dynamismit
sponds to fiscal years 2003 to 2017. þw1 Policy Risk BWi x Dynamismit
Finally, in Model (3), we added a full set of time þb8 Munificenceit
fixed effects and the interaction terms—the product of þu1 Policy Risk BWi x Munificenceit
firm-specific policy risk and policy uncertainty, the
X
87
product of firm-specific policy risk and dynamism, þb9i VIXt þ bji Industryit
and the product of firm-specific policy risk and munif- j¼10
icence—to test Hypotheses 2–4. Model (3) was speci- X
97
fied as: þ bki Yeart þeit
k¼83
Level 1:
Inventoryit ¼b0i þb1i Sales WIit þb2i CapitalIntensity WIit Policy uncertainty and the VIX index dropped out of
þb3i Margin WIit þb4i FirmSize WIit the model because they were perfectly collinear with
the time fixed effects (Wooldridge, 2009), but it is
þb5i Policy Risk WIit þb6i Policy Uncertaintyt
possible to include the interaction terms because firm-
þb7i Dynamismit þb8i Munificenceit specific policy risk varies across firms over time (e.g.,
X
87 Mellast-Parast, Golmohammadi, McFadden, & Miller,
þb9i VIXt þ bji Industryit þeit 2015).
j¼10
October 2020 13
As shown in Table 2 Model (1), the firm-level con- Robustness Tests

trol variables are statistically significant and of the We use a series of robustness tests to address poten-
expected sign. (Recall that inventory turnover was tial concerns stemming from the three primary
reversed for ease of interpretation.) As anticipated sources of endogeneity: measurement error, simultane-
(e.g., Eroglu & Hofer, 2011; Gaur et al., 2005), the ity, and omitted variables (Ketokivi & McIntosh,
effects of sales and capital intensity are negative and 2017; Wooldridge, 2009). First, to address concerns
significant (p < .01), and the effects of gross margin related to measurement error and ensure construct
and firm size are positive and significant (p < .01). validity, Models (1) through (3) were re-estimated
Moving to Model (2), Hypothesis 1 predicted a pos- using the inventory-to-sales ratio as an alternative
itive relationship between firm-specific policy risk and measure of inventory (e.g., Elking et al., 2017). For
inventory. The effect is positive as expected, but it is firm i in year t, the alternative measure of our depen-
not statistically significant at the traditional .05 level dent variable was calculated as:
(p = .064). This suggests that firm-specific policy risk
Avg Inventoryit
alone may not be sufficient to warrant a buffering Inventory2it ¼ ln :
Salesit
response.
Policy uncertainty has a positive and significant where Avg Inventoryit is the average of firm i’s total
effect (p < .01) while the VIX index has a negative inventory reported at the end of fiscal years t-1
and significant effect (p < .01). Although policy uncer- and t and Salesit it is firm i’s sales in year t. The
tainty and the VIX index are certainly correlated results are reported in Table 3 and are largely in
(Baker et al., 2016), they measure different macro- line those obtained using our original inventory
level aspects of the environment. Turning to industry- measure.
level aspects of the environment, the effect of dyna- Additionally, we re-estimated Models (1) through
mism is negative and significant (p < .05) while (3) using alternative measures of the dependent vari-
munificence has a positive but not significant effect. able. For example, Models (1) through (3) were re-es-
These direct effects suggest that firms in dynamic timated using other standardized measures of
industries may operate leaner and hold less inventory, inventory, including measures based on total inven-
whereas firms in munificent industries can afford to tory instead of average inventory, and absolute mea-
hold more inventory. sures, including average inventory and total inventory
Hypotheses 2–4 are tested in Model (3) by exam- (e.g., King & Lenox, 2001). The results are reported in
ining three interaction terms: The product of firm- Tables S1–S3 in the Supporting Information and are
specific policy risk and policy uncertainty, the pro- largely in line with those obtained using our original
duct of firm-specific policy risk and dynamism, and inventory measure.
the product of firm-specific policy risk and munifi- Given that our independent, moderating, and
cence. Hypothesis 2 predicted a positive moderating dependent variables are in different units of measure-
effect of policy uncertainty wherein firms will build ment, we logged our focal variables to improve the
up inventory to a greater extent under conditions of interpretability of our results (Wooldridge, 2009);
high policy uncertainty. The interaction term is munificence was not logged because it can be nega-
positive and significant (p < .01), supporting tive. Models (1) through (3) were also re-estimated
Hypothesis 2. using the standard (i.e., not logged) measures of pol-
Hypothesis 3 predicted a positive moderating effect icy uncertainty and firm-specific policy risk, as well as
of dynamism wherein firms operating in dynamic the anti-log of industry munificence and dynamism
industries will build up inventory to a greater extent (e.g., Pagell & Krause, 2004). The results are reported
to buffer against policy risk. In support of Hypothe- in Table S4 in the Supporting Information and are lar-
sis 3, the interaction term is positive and significant gely in line with those obtained using our original
(p < .01). Hypothesis 4 predicted a negative moderat- measures. Overall, the findings show support for the
ing effect of munificence wherein firms operating robustness of our analysis to concerns related to mea-
under low munificence are likely to accumulate more surement error.
inventory to buffer against policy risk. The interaction While the hybrid approach helps to alleviate endo-
term is negative as predicted, but it is not statistically geneity concerns related to omitted variables (McNe-
significant (p > .10). ish & Kelley, 2019), we conducted additional tests to
In sum, Model (3) provides support for policy ensure the robustness of our results. First, it is possi-
uncertainty and dynamism as moderators of the firm- ble that variations in the accumulation of inventory
specific policy risk—inventory relationship (Hypothe- are a consequence of the firm’s overall risk. To address
ses 2 and 3, respectively) but not for munificence as a this, Models (1) through (3) were re-estimated includ-
moderator (Hypothesis 4). ing the NPRisk Index developed by Hassan et al.

TABLE 3
Hybrid Model Results for Inventory2it
(1) (2) (3)

Dependent Variable: Inventory2it
Fixed Effects
Intercept 0.102 (.171) 0.054 (.617) 0.804 (.617)
Sales BWi 0.250*** (.049) 0.562*** (.052) 0.551*** (.052)
Sales WIit 1.025*** (.025) 1.116*** (.025) 1.253*** (.026)
Capital Intensity BWi 3.103*** (.078) 2.618*** (.088) 2.633*** (.088)
Capital Intensity WIit 2.354*** (.034) 2.333*** (.034) 2.366*** (.034)
Margin BWi 0.008*** (.002) 0.005*** (.002) 0.005*** (.002)
Margin WIit 0.002*** (.000) 0.001*** (.000) 0.001*** (.000)
FirmSize BWi 0.123*** (.022) 0.258*** (.024) 0.257*** (.024)
FirmSize WIit 0.446*** (.013) 0.459*** (.012) 0.471*** (.012)
PolicyRisk BWi 0.023 (.024) 0.580*** (.081)
PolicyRisk WIit 0.005 (.003) 0.002 (.003)
PolicyUncertaintyt 0.269*** (.016)
Dynamismit 4.858** (1.474) 5.752*** (1.632)
Munificenceit 0.193* (.102) 0.433*** (0.107)
VIXt 0.138*** (.014)
PolicyRisk BWi x PolicyUncertaintyt 0.109*** (.015)
PolicyRisk BWi x Dynamismit 1.310*** (.333)
PolicyRisk BWi x Munificenceit 0.018 (.290)
Random Effects
(Variance Components)
Intercept 1.027 0.648 0.649
Residual 0.136 0.134 0.129
Industry Dummies Included Included
Time Fixed Effects Included
–Log Likelihood 13,147 12,373 12,087
v2 Statistic 7,664*** 10,341*** 11,141***
Intraclass Correlation 0.883 0.829 0.834
Firm-Year Observations 19,758 19,758 19,758
Observed Information Likelihood (OIC) standard errors are reported in parentheses.
*p < .10
**p < .05
***p < .01
(2019) as an additional control variable. The NPRisk including the current ratio—a proxy for available slack,
Index measures other types of risk faced by the firm the debt-to-equity ratio—a proxy for potential slack,
(i.e., not policy-related) and uses sequence-based pat- and the general-and-administrative-expenses-to-sales
tern classification methods to identify the share of the ratio—a proxy for recoverable slack (Cheng & Kesner,
conversation that focused on nonpolicy-related risk 1997; Nadkarni & Chen, 2014). The results are
(Hassan et al., 2019). The results are reported in reported in Table S6 in the Supporting Information
Table S5 in the Supporting Information; there were and are largely in line with our original results. Over-
no substantive differences when the NPRisk Index was all, the use of the hybrid approach (McNeish & Kelley,
included as a control variable. 2019) and the consistency of our findings help to alle-
Also, it is possible that firms are not solely building viate concerns related to omitted variables.
up inventory to buffer against policy risk but may also To address concerns related to potential simultane-
be using other (i.e., nonsupply chain) forms of buffers, ity, Models (1) through (3) were re-estimated
such as cash reserves and financial slack. To address using a one-year lag of firm-specific policy risk
this, Models (1) through (3) were re-estimated (Policy Riskit1 ). It is possible that it takes time for
October 2020 15
firms to accumulate inventory in response to potential much more apparent (e.g., Kull & Closs, 2008). Past
policy changes. Our findings reported in Table S7 in findings indicate that increasing inventory does not
the Supporting Information were consistent when the always reduce—and may even increase—risk exposure
lagged measure of firm-specific policy risk was (e.g., Talluri et al., 2013). Consequently, firms may
included instead of our original measure. not accumulate inventory because it exposes them to
Lastly, there are many estimation techniques that greater operational risks by tying up capital. Firms
researchers can use to deal with multilevel data—each of instead may buffer against policy risk by using other
which have advantages and disadvantages. Building on forms of slack or shifting their production locations
McNeish, Stapleton, and Silverman’s (2017) recommen- and trade patterns.
dation to use alternative methods such as cluster-robust While the direct effect of firm-specific policy risk
standard errors, we re-estimated Models (1) through (3) was not significant, the interaction of firm-specific
using random effects models with cluster-robust stan- policy risk and policy uncertainty was positive and
dard errors. This estimation also allows us to decompose significant (i.e., Hypothesis 2). This finding challenges
the within and between effects (Bell & Jones, 2015), and the conventional view that policies and regulations
it is often used to analyze panel data with large n (i.e., have a relatively uniform effect across firms and
number of firms) relative to t (i.e., number of years). The demonstrates the contingent influence of government
results are reported in Table S8 in the Supporting Infor- (e.g., Pastor & Veronesi, 2013). Further, our evidence
mation; there were no substantive differences in our provides preliminary insights into the unintended
results when using this approach. consequences of the policymaking process on supply
chain operations—government action (or inaction)
creates uncertainty and shapes supply chain decisions.
DISCUSSION While more work is needed to identify the effects on
We sought to uncover the extent to which firms use important supply chain aspects and activities beyond
inventory—a fundamental supply chain buffering inventory, our study takes an important first step and
strategy—to mitigate firm-specific policy risk, as well provides a foundation for future research to examine
as the environmental conditions that encourage the direct and/or moderating effects of government-re-
amassing inventory. Our findings illustrate how differ- lated variables (cf. Fugate et al., 2018).
ent varieties and levels of uncertainty shape supply By examining policy uncertainty’s moderating effect
chain operations (Carter, Meschnig, & Kaufmann, on the policy risk—inventory relationship, we also
2015) and, as detailed below, they offer implications find support for resource dependence theory’s con-
for theory, chain practice, and public policy. tentions with regard to indirect resource flows. In
doing so, we complement previous work examining
Implications for Theory and Research direct resource flows from government to firms (e.g.,
In response to concerns that supply chain manage- Harland et al., 2019), as well as direct resource flows
ment research has yet to pay sufficient attention to within the supply chain. While the provision of
the role of government and public policy (Fugate resources is an important role of government and it
et al., 2018), our core contribution centers on moving undoubtedly affects supply chain operations, govern-
policy-related variables to the forefront in order to ment’s indirect role is the more common role of gov-
explicate their effect on supply chain operations. ernment within capitalist economies (Zheng et al.,
Specifically, we theorized about and provided evi- 2015). Examining government’s role as a powerful
dence of how inventory is influenced by risk and contextual actor whose policies can indirectly enhance
uncertainty about the future path of government pol- or restrict the flow of resources between firms is an
icy. Drawing on resource dependence theory, we pos- important next step in understanding government’s
ited in Hypothesis 1 that policy risk induces actions effect on supply chain operations.
from firms to build inventory to bolster their opera- In addition to macro-level conditions, we also exam-
tions against potential policy changes (e.g., Thomp- ined the industry-level conditions under which firms
son, 1967). Interestingly, the lack of support we are more likely to build up inventory to mitigate pol-
found for this hypothesis seemingly lies in contrast to icy risk. Specifically, in Hypotheses 3 and 4, we pos-
a large body of supply chain risk management ited that industry dynamism and industry munificence
research demonstrating that inventory is commonly would have opposing effects on the firm-specific pol-
used as a hedge against various unknowns (e.g., Kou- icy risk—inventory link. Interestingly, we only found
velis, Pang, & Ding, 2018; Manuj, Esper, & Stank, support for the moderating effect of industry dyna-
2014). Perhaps firms do not view policy risk, in and mism; it magnified firms’ use of risk mitigation strate-
of itself, as a sufficient threat to trigger the accumula- gies, whereas industry munificence seemingly did not
tion of inventory as a buffer—unlike supply-related attenuate firms’ risk perceptions. Although industry
risks whose potential effects on resource flows are munificence is conceptualized as a dimension of

industry uncertainty (e.g., Dess & Beard, 1984), it United Kingdom (U.K.), firms in the U.K. also stock-
does not necessarily imply unpredictability of future piled over fifty billion dollars of additional inventory
resource flows and thus may not warrant a buffering (Sider, 2018). Beyond trade policy, there are other
response. This nonsignificant finding is also in line arenas that increase policy risk and around which
with Azadegan et al. (2013 p. 194), who found that there are changing degrees of uncertainty, including
“with the rise of globalization and access to more policy related to supply chain transparency and even
markets and resources, environmental munificence policy related to trucking and other forms of trans-
has less impact.” portation.
Taken together with the body of research on corpo- Our findings show that firms are more likely to
rate political action (e.g., Hillman et al., 2004), our build up inventory as a buffer against policy risk
findings suggest that there is no one “right” way to when policy uncertainty rises. If understood, knowl-
manage policy risk. The premise that “firms are edge of this tendency can be leveraged to predict how
dependent on government, therefore they will engage competitors are likely to respond to increases in pol-
in corporate political action” has become almost a icy uncertainty. For example, managers can preempt
truism (Hillman et al., 2009 p. 1412), but only large competitors’ moves and ensure access to critical inputs
firms can absorb the costs and challenges associated by placing orders with suppliers ahead of policy
with these cooptation strategies. Compared to connec- changes. Indeed, in the late 2010s, companies who
tions with policymakers, lobbying, and campaign con- took a “wait-and-see” approach to trade policy
tributions, the risk-reducing benefits of inventory are debates faced significant shortages of goods after com-
much more tangible and immediate (e.g., Talluri petitors stockpiled inventory in advance of tariffs
et al., 2013). Our study thus contributes to interdisci- going into effect (Coates, 2018). For example, manu-
plinary research on the firm–government interface by facturers purchasing aluminum foil faced dramatic
providing a broader perspective on the mitigation shortages after the implementation of steep tariffs on
strategies firms use to navigate uncertain political Chinese producers (Postrel, 2017). The tariffs made
environments. Chinese foil prohibitively expensive, which created a
More broadly, our study contributes to the body of run on the limited supply from producers in other
work on the multifaceted nature of uncertainty; uncer- countries and, in turn, drove up their prices.
tainty is a phenomenon that affects individuals, firms, Moreover, managers can also leverage knowledge of
industries, and economies (Carter et al., 2015; Flynn this tendency to improve coordination with supply
et al., 2016). In line with this, our findings suggest chain partners (e.g., Paulraj & Chen, 2007). For exam-
that government policy does not have a homogenous ple, managers can negotiate quantity discounts with
effect across firms—despite the fact firms operate in suppliers, which would allow them to lock in low-
the same macroeconomic environment. This corrobo- priced supply of critical inputs. Managers can also
rates Hassan et al.’s (2019, p. 3) observation that adjust system-generated demand forecasts in times of
most of the variation “appears to play out at the level increased policy uncertainty to produce greater stock
of the firm, rather than the level of (conventionally to preempt customers’ buffering behaviors (Blattberg
defined industry sectors) or the economy as a whole.” & Hoch, 1990). Such adjustments would enable firms
Because government policymaking is a proverbial “fact to achieve greater sales than they might otherwise
of life,” decomposing its influence on supply chain enjoy, increase revenue, and potentially capture mar-
operations is an important contribution. ket share from out-of-stock competitors.
In leveraging this information, managers also must
Implications for Supply Chain Managers be aware of nuances within their industry and their
One of the most interesting practical implications of customers’ and suppliers’ industries, as our findings
this research relates to the moderating effect of policy indicated that firms manage policy risk differently
uncertainty on the policy risk–inventory relationship. under different industry conditions. In dynamic
Hasbro’s decision to stockpile inventory noted earlier industries, managers should expect to see more stock-
illustrated the tangibility of this interaction. Given piling in response to policy risk, as dynamism was
that over two-thirds of its production is in China, shown to strengthen the relationship between policy
Hasbro’s exposure to policy changes increased as the risk and inventory. If a firm’s customers operate in a
United States and China embarked upon a trade war dynamic industry, managers should consider how cus-
(Kapadia, 2019). At the same time, uncertainty about tomers with higher policy risk will react. In general,
the severity of the trade war also increased, leading they appear more likely to buffer policy risk with
Hasbro to build inventories in its supply chain to buf- inventory.
fer against potential cost increases. Hasbro was not Our findings also show that the effect of policy risk
alone in its response to uncertainty. For example, in varies within industries. Due in part to firm character-
response to uncertainty surrounding “Brexit” in the istics, some firms are sheltered from policy changes
October 2020 17
whereas others are more vulnerable. For example, The U.S. federal government has taken some modest
Steve Madden, a firm mentioned earlier, was more steps to reduce policy uncertainty. Just as firms moni-
vulnerable to trade policy changes because it sourced tor the government, the government monitors the
more products from China than its competitors (Wolf, economy to decide the direction of future policy. For
2018). Understanding this variability is important for example, the U.S. Department of Commerce collects
managers as they determine how to adjust their strate- and analyzes data on a number of indicators, includ-
gies to account for potential policy changes. As out- ing gross domestic product (GDP), unemployment,
lined in institutional theory, firms tend to imitate various price indices, and the S&P 500 Stock Index to
other firms (Zhu, Sarkis & Lai, 2013), particularly in evaluate the state of the economy. Such data are avail-
uncertain environments, so it is important for man- able publicly, allowing firms to gauge potential
agers to understand how their firm’s policy risk com- responses from policymakers. Further, regulatory agen-
pares to that of competitors. Managers can leverage cies collect and analyze data from consumers, firms,
knowledge of this variability to determine whether and industry groups on the costs and benefits of alter-
competitor moves to build up inventory are a conse- native policies as they disseminate regulations (Mor-
quence of idiosyncratic firm-level factors or warrant rall & Broughel, 2014). This is facilitated through the
imitation. “notice-and-comment” rulemaking process, which
Moreover, just as increased risk and uncertainty can requires regulatory agencies to publish proposed rules
induce overreaction at the firm-level, increased risk or changes to existing rules on the Federal Register
and uncertainty can also become amplified through and accept comments from the general public.
the supply chain—a phenomenon known as the bull- While these were important steps, the persistence of
whip effect (Forrester, 1961). As such, it is important buffering responses demonstrates that there is plenty
for managers to understand their suppliers’ and cus- of room for policymakers to further reduce policy
tomers’ exposure to policy risk as well. For example, uncertainty. Although the indicators and costs consid-
managers can use this knowledge about customers to ered in these regulatory impact analyses have
gauge whether additional orders or increased order expanded, the direction of future policy is often
quantities are a legitimate signal of rising demand or decided without an understanding of the second- and
simply a strategy by customers to hedge against their third-order implications (Sowell, 2009; Tokar &
own exposure to policy changes. As policy uncertainty Swink, 2019). Indeed, Sowell (2009 p.vii) points out
subsides, it is natural for firms to “bleed off” inven- that most policymakers tend to evaluate only the “im-
tory that was held as a buffer and decrease orders to mediate consequences” of their decisions. As supply
suppliers. If suppliers are unaware that customers are chains become longer and more complex, the effect of
bleeding off buffer inventory, they may not adjust policy uncertainty can become amplified as it moves
production plans accordingly and, in turn, face across the supply chain and result in burdensome
increased inventory (Lee, Padmanabhan, & Wang, inventory in echelons further upstream. In this sense,
1997). our research suggests that policymakers’ decision cal-
culus needs to consider the systemic implications of
potential policy changes on supply chains and
Implications for Policymakers
extended supply networks. That is not to say that poli-
For policymakers, our findings show that firms react
cymakers are unaware of second- and third-order
to uncertainty about the government’s approach to
implications, but rather that they may be responding
economic affairs by building up inventory. This accu-
to different incentives, such as ensuring re-election
mulation of inventory ties up working capital, which
and securing funding for constituents (Buchanan,
in turn constrains firms’ ability to invest in other
1954; Meier, 2015).
important activities such as expanding to new mar-
Policy uncertainty involves the inability of stake-
kets, hiring new employees, and paying dividends to
holders to accurately and consistently predict what
shareholders. Firms incur additional costs by holding
policymakers will do under a given set of circum-
inventory, which reduces profit. As such, our findings
stances. Policymakers could reduce policy uncertainty
provide additional albeit indirect evidence of the
by consistently abiding by a set of known—and
dampening effect of policy uncertainty on economic
clearly communicated—principles and/or committing
activity and growth (e.g., Bernanke, 1983). While
to a particular threshold for intervention and regula-
some policy uncertainty is inevitable due to the
tion. The less frequently they choose to exercise
debate, discussion, and freedom of speech fundamen-
power, the less opportunities there are to create policy
tal to democracy (Hayek, 1978), policymakers would
uncertainty. This is not to suggest creating an environ-
be prudent to consider the economic impact of ques-
ment without policies and regulations, as policies and
tions surrounding their actions and decisions and to
regulations are essential for setting the “rules of the
take steps to mitigate that uncertainty.
game” (Friedman, 1962 p. 15). Rather, given the

dampening effects of policy uncertainty, the imposi- understand how firms interpret macro-level environ-
tion of new rules is perhaps best limited to cases mental signals related to policy changes and industry-
where it is absolutely necessary. level signals related to the availability of resources
Overall, our research suggests that policymakers (Connelly, Ketchen, & Slater, 2011).
should not only consider the impact of policies on Our sample was limited to publicly traded firms,
supply chains, but they must also consider the uncer- which tend to be larger, older, and more likely to be
tainty leading up to policy decisions. Uncertainty sur- in some industries (e.g., manufacturing) than others
rounding the future of economic policy increases (e.g., food service). While typical for research using
buffering in a way that is counterproductive to supply financial data, it is a limitation of our research. Pub-
chain operations and ultimately the economy. licly traded firms may be more likely to respond to
policy risk for two reasons: (1) shareholders, financial
Limitations and Future Research analysts, and investors expect strategic responses to
Our study has several limitations; each of which address risk and (2) publicly traded firms tend to
provides opportunities for future research. First, while interact more frequently with policymakers (Dutt &
we focused on inventory, a more controllable buffer- Joseph, 2019). Further work is needed to examine if
ing mechanism, others are also important and may and to what extent privately held firms use inventory
shed light on why we did not find support for to cope with policy risk.
Hypothesis 1. For example, in response to recent tar- Our sample was also limited to firms with non-
iffs on China-sourced goods, many companies have blank, nonzero measures for our key variables. While
sought alternative suppliers in other countries or sample selection tests indicated it was representative
begun re-locating production to other areas (e.g., of the overall sampling frame in terms of firm-specific
Coates, 2018). More broadly, mechanisms such as policy risk, our sample had firms with higher sales
interorganizational linkages or information from and fewer employees than those excluded from our
external sources and third parties can be used to miti- sample. With regard to the political environment, the
gate the negative effects of the policymaking process. difference in number of employees—our proxy for
Future research could tap into these alternatives, per- firm size—is particularly salient. Smaller firms have a
haps via qualitative methods such as grounded theory narrower repertoire of strategies to manage their vul-
building (Ketchen, Wowak, & Craighead, 2014), to nerability to government action and thus may build
develop in-depth understanding of how firms use vari- up inventory to a greater extent to protect their opera-
ous strategies to cope with policy risk. tions. Future research could examine how size shapes
Our focus on the U.S. took a meaningful new step firms’ responses to the political environment.
given that extant research that acknowledges the effect Lastly, our sample underrepresented information,
of government on supply chain management has lar- finance, and real estate industries and overrepresented
gely done so in the context of emerging and transition manufacturing industries. This industry representation
economies, such as China (Bai et al., 2016; Cai, Jun, is suitable given our focus on how firms use inventory
& Yang, 2010), Russia (Davis-Sramek et al., 2017), to buffer against policy risk, but information, finance,
and India (Saldanha, Mello, Knemeyer, & Vijayaragha- and real estate industries are more regulated and thus
van, 2015). Further inquiry is needed to discover if have greater exposure to potential policy changes.
policy uncertainty in other sociopolitical contexts elic- Additional work is needed to understand the strategies
its the same supply chain buffering responses. Such firms in these industries use to manage resource
work could rely on the BBD Index, which is available dependencies and reduce the effects of government
for other countries through FRED and the Economic action.
Policy Uncertainty database.
From a theoretical standpoint, resource dependence
theory was a strong fit to fulfill our study’s purpose, CONCLUSION
but other theoretical lenses could be leveraged to shed A Danish proverb amusingly cautions that predic-
additional light. For example, future research could tions are difficult to make—especially about the
draw on organizational information processing theory future. In trying to guide their firms toward success,
(Daft & Weick, 1984) to better understand if and to managers must make predictions about the future and
what extent data analytics can be used to cope with then take actions to prepare their firms for what tran-
policy uncertainty by predicting government moves. spires. These predictions become more difficult to the
Real options theory could also be used to diagnose extent that uncertainty surrounds government policy.
how firms set the stage for alternative courses of Our hope is that our findings highlight for researchers
action to deal with policy risk and the conditions the importance of accounting for policy-related vari-
under which they execute those options (Hult et al., ables within their nomological networks, inform man-
2010). Signaling theory could also be used to agers about how firms tend to respond to government
October 2020 19
action (or inaction), and lead policymakers to be cau- Bode, C., Wagner, S. M., Petersen, K. J., & Ellram, L.
tious about the unintended consequences of unpre- M. (2011). Understanding responses to supply
dictability and ambiguity surrounding their actions. chain disruptions: Insights from information pro-
Such impacts among these key constituencies might cessing and resource dependence perspectives.
make the future a little more predictable. Academy of Management Journal, 54, 833–856.
Bonaime, A., Gulen, H., & Ion, M. (2018). Does pol-
icy uncertainty affect mergers and acquisitions?
Journal of Financial Economics.
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October 2020 23
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The Academy of Management Annals, 7, 441–488. superior organizational performance. He currently
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Management Journal, 36, 1615–1636. cation and Outreach; Garrison Endowed Chair in Sup-
Zhu, Q., Sarkis, J., & Lai, K. H. (2013). Institutional- ply Chain Management at the University of Arkansas
based antecedents and performance outcomes of
internal and external green supply chain manage- Travis Tokar (Ph.D., University of Arkansas). Dr.
ment practices. Journal of Purchasing and Supply
Tokar is an Associate Professor of Supply Chain Man-
Management, 19, 106–117.
agement at Texas Christian University. His research
interests include behavioral issues in supply chain
management; last mile logistics; public policy.
Jessica L. Darby (Ph.D., University of Arkansas) is SUPPORTING INFORMATION

an Assistant Professor at Harbert College of Business, Additional Supporting Information may be found in
Auburn University, Dr. Darby’s research focuses pri- the online version of this article:
marily on the role of markets and institutions, such as
governments, regulatory agencies, and financial mar-
kets, in supply chain operations and decision-making. Appendix S1. Robustness tests: Measurement error.
Her research has appeared in several journals, includ- Table S1. Hybrid Model Results for Inventory3it
ing Journal of Business Logistics, International Journal of Table S2. Hybrid Model Results for Inventory4it
Logistics Management, and International Journal of Pro- Table S3. Hybrid Model Results for Inventory5it
duction Economics. Table S4. Hybrid Model Results for Inventoryit
Table S5. Hybrid Model Results for Inventoryit
David J. Ketchen Jr. (Ph.D., Penn State University) Table S6. Hybrid Model Results for Inventoryit
is the Harbert Eminent Scholar, Department of Man- Table S7. Hybrid Model Results for Inventoryit
agement at Auburn University. His research interests Table S8. Random Effects Model Results for Inven-
include entrepreneurship and franchising, method- toryit
ological issues in organizational research, strategic

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Journal of Supply Chain Management

2020, 56(4), 3–24

THE IMPLICATIONS OF FIRM-SPECIFIC POLICY RISK,

The risk created by government policymaking can be daunting, but little

INTRODUCTION Sramek, Fugate, Miller, Germain, Izyumov & Krotov,

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Firm-Specific Policy Risk and Inventory

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where Total Inventoriesit is firm i’s total inventory in

10 Volume 56, Number 4

2019). We thus accommodated the panel structure

occur within firms over time (e.g., Certo, Withers, &

data (e.g., Bell & Jones, 2015; McNeish & Kelley,

to omitted variables” (McNeish & Kelley, 2019 p.

presence of unbalanced panels (Bell & Jones, 2015).

Moreover, performing a Hausman (1978) test

(v2 = 492.69, p < .01) on our data indicated that

we should reject the null hypothesis that there are

no differences between within and between effects.

As Bell and Jones (2015 p. 144) point out: “The

Hausman test is not a test of fixed effects versus

approach to disentangle within- and between-firm

Separating the within and between effects is also

et al., 2017; Miller et al., 2018). For example, a

whose policy risk has increased will build up inven-

is consistent with the contention that firms continu-

ronments over time (Thompson, 1967). In contrast,

firms with higher policy risk will build up inventory

This is consistent with the contention that differ-

environments. Our theorizing for H1, H2, H3, and

H4 centers on between-firm interpretation and using

effects to address endogeneity concerns. Moreover,

the intraclass correlation coefficients (ICCs) of

0.865, 0.813, and 0.818 (see Table 2) indicate that

a significant percentage of overall variance—more

than 80%—is explained by between-firm variability

(Certo et al., 2017), and a likelihood-ratio test indi-

cated that there is enough variability between firms

to favor a mixed-effects model over a standard

model (v2 = 20,519.40; p < .0001).

Our estimation procedure had three steps. First, in Level 2:

(1) (2) (3)

Dependent Variable: Invetoryit

Observed Information Likelihood (OIC) standard errors are reported in parentheses.

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As shown in Table 2 Model (1), the firm-level con- Robustness Tests

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(1) (2) (3)

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Jessica L. Darby (Ph.D., University of Arkansas) is SUPPORTING INFORMATION

24 Volume 56, Number 4

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