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Inventory Changes and Future Returns

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  • Jacob K. Thomas

  • Huai Zhang

Abstract

We find that the negative relation between accruals and future abnormal returns documented by Sloan (1996) is due mainly to inventory changes. We propose three explanations for this result, derived from the prior literature, but find evidence inconsistent with all three explanations. To assist future investigations in formulating additional explanations, we document several empirical regularities for extreme inventory change deciles. We speculate that demand shifts explain our results, and examine the feasibility of alternative reasons for the stock market's apparent inability to recognize the impending profitability reversals. Our evidence is consistent with earnings management masking the implications of demand shifts.

Suggested Citation

  • Jacob K. Thomas & Huai Zhang, 2002. "Inventory Changes and Future Returns," Review of Accounting Studies, Springer, vol. 7(2), pages 163-187, June.
    • Handle: RePEc:spr:reaccs:v:7:y:2002:i:2:d:10.1023_a:1020221918065
    DOI: 10.1023/A:1020221918065
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    References listed on IDEAS

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    1. Abarbanell, JS & Bushee, BJ, 1997. "Fundamental analysis, future earnings, and stock prices," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 35(1), pages 1-24.
    2. Paul Hribar & Daniel W. Collins, 2002. "Errors in Estimating Accruals: Implications for Empirical Research," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 40(1), pages 105-134, March.
    3. Mark T. Bradshaw & Scott A. Richardson & Richard G. Sloan, 2001. "Do Analysts and Auditors Use Information in Accruals?," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 39(1), pages 45-74, June.
    4. Collins, Daniel W. & Hribar, Paul, 2000. "Earnings-based and accrual-based market anomalies: one effect or two?," Journal of Accounting and Economics, Elsevier, vol. 29(1), pages 101-123, February.
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    Cited by:

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    2. Jeremiah Green & John R. M. Hand & X. Frank Zhang, 2013. "The supraview of return predictive signals," Review of Accounting Studies, Springer, vol. 18(3), pages 692-730, September.
    3. Patricia M. Dechow & Weili Ge, 2006. "The persistence of earnings and cash flows and the role of special items: Implications for the accrual anomaly," Review of Accounting Studies, Springer, vol. 11(2), pages 253-296, September.
    4. Linna Shi & Huai Zhang, 2012. "Can the earnings fixation hypothesis explain the accrual anomaly?," Review of Accounting Studies, Springer, vol. 17(1), pages 1-21, March.
    5. Shai Levi, 2008. "Voluntary disclosure of accruals in earnings press releases and the pricing of accruals," Review of Accounting Studies, Springer, vol. 13(1), pages 1-21, March.
    6. Hemang Desai & Srinivasan Krishnamurthy & Kumar Venkataraman, 2006. "Do Short Sellers Target Firms with Poor Earnings Quality? Evidence from Earnings Restatements," Review of Accounting Studies, Springer, vol. 11(1), pages 71-90, March.
    7. Michael S. Drake & Linda A. Myers, 2011. "Analysts’ accrual-related over-optimism: do analyst characteristics play a role?," Review of Accounting Studies, Springer, vol. 16(1), pages 59-88, March.
    8. Baruch Lev & Siyi Li & Theodore Sougiannis, 2010. "The usefulness of accounting estimates for predicting cash flows and earnings," Review of Accounting Studies, Springer, vol. 15(4), pages 779-807, December.

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