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The impact of inventory dynamics on long‐term stock returns – An empirical investigation of U.S. manufacturing companies
Author(s) -
Steinker Sebastian,
Hoberg Kai
Publication year - 2013
Publication title -
journal of operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.649
H-Index - 191
eISSN - 1873-1317
pISSN - 0272-6963
DOI - 10.1016/j.jom.2013.05.002
Subject(s) - stock (firearms) , volatility (finance) , econometrics , inventory turnover , economics , business , stock market , perpetual inventory , financial economics , stock exchange , inventory management , operations management , finance , inventory theory , mechanical engineering , paleontology , horse , engineering , biology
This paper investigates the relationship between the inventory dynamics and long‐term stock returns of a large panel of U.S. manufacturing firms over the time period from 1991 to 2010. We propose two measures of inventory dynamics: one metric to assess the fluctuations of quarterly inventories within the year and a second metric to quantify relative year‐over‐year inventory growth. Our results indicate that within‐year inventory volatility (IV) and abnormal year‐over‐year inventory growth (ABI) are associated with abnormal stock returns. Both metrics cannot be entirely explained by common risk factors. We find that firms with high IV and low ABI have the best long‐term stock returns, and that stock performance decreases monotonically with higher ABI values. Our results are robust to various control variables including size, book‐to‐market value, industry and prior performance. We therefore conclude that changes in inventory levels provide valuable insights into the risks and opportunities faced by a company.