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The Relationship Between Abnormal Inventory Growth and Future Earnings for U.S. Public Retailers

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  • Saravanan Kesavan

    (Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Chapel Hill, North Carolina 27599)

  • Vidya Mani

    (Smeal College of Business, Pennsylvania State University, University Park, Pennsylvania 16802)

Abstract

In this paper, we examine the relationship between inventory levels and one-year-ahead earnings of retailers using publicly available financial data. We use benchmarking metrics obtained from operations management literature to demonstrate an inverted-U relationship between abnormal inventory growth and one-year-ahead earnings per share for retailers. We also find that equity analysts do not fully incorporate the information contained in retailers' abnormal inventory growth in their earnings forecasts, resulting in systematic biases. Finally, we show that an investment strategy based on abnormal inventory growth yields significant abnormal stock market returns.

Suggested Citation

  • Saravanan Kesavan & Vidya Mani, 2013. "The Relationship Between Abnormal Inventory Growth and Future Earnings for U.S. Public Retailers," Manufacturing & Service Operations Management, INFORMS, vol. 15(1), pages 6-23, May.
    • Handle: RePEc:inm:ormsom:v:15:y:2013:i:1:p:6-23
    DOI: 10.1287/msom.1120.0389
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    References listed on IDEAS

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    Cited by:

    1. Maican, Florin & Orth, Matilda, 2018. "Inventory Behavior, Demand, and Productivity in Retail," CEPR Discussion Papers 13308, C.E.P.R. Discussion Papers.
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    3. Michael Becker‐Peth & Kai Hoberg & Margarita Protopappa‐Sieke, 2020. "Multiperiod Inventory Management with Budget Cycles: Rational and Behavioral Decision‐Making," Production and Operations Management, Production and Operations Management Society, vol. 29(3), pages 643-663, March.
    4. Pasirayi, Simbarashe & Fennell, Patrick B. & Sen, Argha, 2023. "The effect of third-party delivery partnerships on firm value," Journal of Business Research, Elsevier, vol. 167(C).
    5. Kroes, James R. & Manikas, Andrew S. & Gattiker, Thomas F., 2018. "Operational leanness and retail firm performance since 1980," International Journal of Production Economics, Elsevier, vol. 197(C), pages 262-274.
    6. Chiang, Chung-Yean & Qian, Zhuang & Chuang, Chia-Hung & Tang, Xiao & Chou, Chia-Ching, 2023. "Examining demand and supply-chain antecedents of inventory dynamics: Evidence from automotive industry," International Journal of Production Economics, Elsevier, vol. 259(C).
    7. Fan, Di & Liang, Tianheng & Yeung, Andy C.L. & Zhang, Haomin, 2020. "The impact of capacity-reduction initiatives on the stock market value of Chinese manufacturing firms," International Journal of Production Economics, Elsevier, vol. 223(C).
    8. Feng, Cong & Fay, Scott, 2022. "An empirical investigation of forward-looking retailer performance using parking lot traffic data derived from satellite imagery," Journal of Retailing, Elsevier, vol. 98(4), pages 633-646.
    9. Yasin Alan & George P. Gao & Vishal Gaur, 2014. "Does Inventory Productivity Predict Future Stock Returns? A Retailing Industry Perspective," Management Science, INFORMS, vol. 60(10), pages 2416-2434, November.
    10. Feng, Cong & Fay, Scott, 2020. "Store Closings and Retailer Profitability: A Contingency Perspective," Journal of Retailing, Elsevier, vol. 96(3), pages 411-433.
    11. Saravanan Kesavan & Tarun Kushwaha & Vishal Gaur, 2016. "Do High and Low Inventory Turnover Retailers Respond Differently to Demand Shocks?," Manufacturing & Service Operations Management, INFORMS, vol. 18(2), pages 198-215, May.
    12. Maican, Florin & Orth, Matilda, 2021. "Determinants of economies of scope in retail," International Journal of Industrial Organization, Elsevier, vol. 75(C).
    13. Dbouk, Wassim & Moussawi-Haidar, Lama & Jaber, Mohamad Y., 2020. "The effect of economic uncertainty on inventory and working capital for manufacturing firms," International Journal of Production Economics, Elsevier, vol. 230(C).
    14. Feng, Cong & Fay, Scott, 2021. "Chief stores officer and retailer performance," Journal of Retailing and Consumer Services, Elsevier, vol. 58(C).
    15. Fay, Scott & Feng, Cong & Patel, Pankaj C., 2022. "Staying small, staying strong? Retail store underexpansion and retailer profitability," Journal of Business Research, Elsevier, vol. 144(C), pages 663-678.
    16. Eroglu, Cuneyt & Hofer, Christian & Hofer, Adriana Rossiter & Hou, Young, 2023. "“Cultural inventories”: How dimensions of national culture moderate the effect of demand unpredictability on firm-level inventories," International Journal of Production Economics, Elsevier, vol. 264(C).
    17. Zhou, Chenxi & Yu, Jibin, 2023. "Does it pay to withdraw marketing metrics disclosure? An empirical study of retailers’ cessation of monthly comparable-store sales," Journal of Business Research, Elsevier, vol. 156(C).
    18. Costa Melo, Isotilia & Alves Junior, Paulo Nocera & Callefi, Jéssica Syrio & da Silva, Karoline Arguelho & Nagano, Marcelo Seido & Rebelatto, Daisy Aparecida do Nascimento & Rentizelas, Athanasios, 2023. "Measuring the performance of retailers during the COVID-19 pandemic: Embedding optimal control theory principles in a dynamic data envelopment analysis approach," Operations Research Perspectives, Elsevier, vol. 10(C).
    19. Felipe Caro & A. Gürhan Kök & Victor Martínez-de-Albéniz, 2020. "The Future of Retail Operations," Manufacturing & Service Operations Management, INFORMS, vol. 22(1), pages 47-58, January.

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