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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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