Evidence on the Relation between Inventory Changes, Earnings and Firm Value

The International Journal of Business and Finance Research, Vol. 5, No. 3, pp. 1-14, 2011

14 Pages Posted: 6 Jul 2011

See all articles by Nilanjan Basu

Nilanjan Basu

Concordia University, Quebec - John Molson School of Business

Xing Wang

Georgia Institute of Technology - The H. Milton Stewart School of Industrial & Systems Engineering (ISyE)

Date Written: 2011

Abstract

Prior studies contend that an unexpected increase in inventory reflects a firm’s difficulty in generating sales and results in negative earnings growth and stock returns. Using a sample with over 85,000 observations for the period of 1950-2005, we confirm the negative relation between inventory changes and firm performance but find that the relation is sensitive to the choice of sample period. Moreover, this relation is somewhat attenuated for firms in the wholesale and retail industry as well as for firms that normally carry low levels of inventory. Our findings suggest that the macroeconomic and industry-specific environments are important moderators of the relation between inventory changes and firm performance.

Keywords: Inventory, Working capital management

JEL Classification: G34

Suggested Citation

Basu, Nilanjan and Wang, Xing, Evidence on the Relation between Inventory Changes, Earnings and Firm Value (2011). The International Journal of Business and Finance Research, Vol. 5, No. 3, pp. 1-14, 2011, Available at SSRN: https://ssrn.com/abstract=1879403

Nilanjan Basu (Contact Author)

Concordia University, Quebec - John Molson School of Business ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

Xing Wang

Georgia Institute of Technology - The H. Milton Stewart School of Industrial & Systems Engineering (ISyE) ( email )

765 Ferst Drive
Atlanta, GA 30332-0205
United States

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