There are two problems with the use of the relative importance of inventories as a measure of an industry’s liquidity needs. The first problem is that this ratio is higher for durable goods. Given that durable goods sectors are in general more volatile than the average, using this measure of liquidity needs to estimate equation (2) may erroneously attribute the relation between durability and volatility to liquidity needs. This concern will be addressed by adding appropriate controls to the estimation of equation (2) and it will prove to be unimportant. The second problem is that there is wide macroeconomic evidence that the ratio of inventory to sales has been decreasing in the U.S. since the early 80’s (see Blanchard and Simon (2000), and Kahn et al. (2001) ). This trend may be a problem not only because it makes difficult to define a typical value of the ratio, but also because it may affect the relative ranking of liquidity needs across sectors. However, the data shows that the trend is widespread within manufactures and does not significantly affect the relative ranking of liquidity needs: the correlation between the measures of inventories over sales across industries built for different years is very high and significant. For example, the correlation between the measure of inventories over assets across industries in 1980 and 1995 is 0.7, and even between 1971 and 1999 is 0.6 and significant at the 1% level.<sup>13</sup> The relative stability of the ranking of inventories to sales ratio across industries indicates that the effect of the trend in the results is likely to be minor.<sup>14</sup> Table 1 presents the value of inventories over sales for the 70 4 digit ISIC sectors considered in the analysis.<sup>15</sup> This measure is summarized in column (1). Columns (2) to (4) show some alternative measures of liquidity needs for comparison.<sup>16</sup> Column (2) shows the ratio of total inventories over assets. Column (3) reports the _Cash Conversion Cycle_ (henceforth CCC), which estimates the length in days between the moment a firm pays for its raw materials and the moment it is paid for the sale of its final output during the normal course of operations (see Richards and Laughlin (1980))<sup>17</sup> . Finally, column (4) reports the median of the labor cost to shipments

> 13The rank correlations are 0.72 between 1980 and 1995, and 0.64 between 1971 and 1999

> 14In order to check the importance of the trend in inventories **,** the measure of inventories over sales was also built for the periods 1970-1979, and 1990-1999. The use of these different periods to estimate a sector’s liquidity needs does not affect the conclusions (the results of these regressions are contained in appendix D).

> 15There are 81 non-inclusive 4 digit ISIC sectors; for 11 of them either there is no data available in Compustat or there are fewer than 5 firms in the sector.

> 16The robustness of the results to the use of these alternative measures is reported in appendix D.

> 17The CCC is defined as the average age of inventories ( _inventories_ x 365 _/cost of goods sold_ ) plus the average age of accounts receivable ( _account receivables_ x 365 _/sales_ ) minus the average age of accounts payable ( _accounts payable_ x 365 _/cost of goods sold_ ).

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