rowly defined industries (4 digit ISIC), so the scope for variations in technology across countries is significantly reduced.

The previous two assumptions guarantee that a measure of liquidity needs can be built for different industries in the U.S., and extrapolated to other countries. However, these assumptions do not deal with the potential relation between financial markets and observed levels of working capital. This concern will be reduced because the data used to build the measures of liquidity needs comes from relatively large U.S. companies. The reason is twofold: first, the U.S. is among the most developed financial markets in the world so financial constraints should be less important for U.S. firms than for firms in other countries; second, within the U.S., relatively large firms are likely to be the less constrained in their access to external liquid funds (Fazzari et al. (1988); Gertler and Gilshrist (1994)). In other words, by focusing on large U.S. corporations we can assume that the supply of liquid funds is almost perfectly elastic, and, therefore, the observed differences in relative working capital levels across industries are mainly demand driven.

The measure of liquidity needs was built using balance sheet data for U.S. public manufacturing firms from Compustat. Balance sheet data does not provide information on the ongoing amount of liquid assets that a firm invests to finance its operations, which corresponds to the economic concept of working capital, but it only reports the different components of the stock of liquid assets and liabilities of a firm. So, only a proxy of the relative importance of working capital can be obtained.

The proxy used in the main results of this paper is the relative importance of inventories for each industry. It was computed as the median ratio of _inventories over sales_ (Compustat #3 over Compustat #12) across all Compustat firms belonging to that industry during the period 1980-1989. Nevertheless, the results are robust to the use of alternative measures of liquidity needs.<sup>10</sup> There is a clear link between the relative importance of inventories, working capital, and technology: firms need working capital because goods take time to produce, and it is reasonable to expect that firms with long production processes will have a large value of inventories.<sup>11</sup><sup>_,_12</sup> On the contrary, it is very difficult to argue for a role of technology in the determination of other components of a firm’s current assets, like cash stocks. These components are more likely to be determined by market conditions rather than technology, and, as long as market conditions vary more from country to country than technologies, measures of liquidity needs based mainly on these other components would be less easily extrapolable from U.S. firms to other countries.

> 10The details of industry aggregation are described in appendix A.

> 11This relationship was noted long ago by Keynes, who defined working capital as the cost of the aggregate of goods in course of production, manufacture, transport, etc., including the stocks required to avoid risks of interruption of process or to tide over seasonal irregularities.

> 12Other important determinant of the level of inventories is the degree of demand uncertainty. Under this interpretation, the relative importance of inventories may not only be capturing the average level of liquidity needs of a sector, but also the volatility of these needs. This interpretation is formally tested in the robustness section (Section 7.1).

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