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The Inventory Growth Spread

Author

Listed:
  • Belo, Frederico

    (University of MN)

  • Lin, Xiaoji

    (OH State University)

Abstract

Previous studies show that firms with low inventory growth outperform firms with high inventory growth in the cross-section of publicly traded firms. In addition, inventory investment is volatile and procyclical, and inventory-to-sales is persistent and countercyclical. We embed an inventory holding motive into the investment-based asset pricing framework by modeling inventory as a factor of production with convex and nonconvex adjustment costs. The augmented model simultaneously matches the large inventory growth spread in the data, as well as the time-series properties of the firm level capital investment, inventory investment, and inventory-to-sales. Our conditional single-factor model also implies that traditional unconditional factor models such as the CAPM should fail to explain the inventory growth spread, although not with the same large pricing errors observed in the data.

Suggested Citation

  • Belo, Frederico & Lin, Xiaoji, 2012. "The Inventory Growth Spread," Working Paper Series 2012-23, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  • Handle: RePEc:ecl:ohidic:2012-23
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    Cited by:

    1. Xiaoji Lin & Fan Yang & Frederico Belo, 2014. "External Equity Financing Costs, Financial Flows, and Asset Prices," 2014 Meeting Papers 863, Society for Economic Dynamics.
    2. Jacobs, Heiko, 2015. "What explains the dynamics of 100 anomalies?," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 65-85.
    3. Frederico Belo & Xiaoji Lin & Maria Ana Vitorino, 2014. "Brand Capital and Firm Value," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(1), pages 150-169, January.
    4. Jones, Christopher S. & Tuzel, Selale, 2013. "Inventory investment and the cost of capital," Journal of Financial Economics, Elsevier, vol. 107(3), pages 557-579.
    5. Xiaoji Lin & Lu Zhang, 2011. "Covariances versus Characteristics in General Equilibrium," NBER Working Papers 17285, National Bureau of Economic Research, Inc.
    6. Kent Daniel & David Hirshleifer & Lin Sun, 2017. "Short and Long Horizon Behavioral Factors," NBER Working Papers 24163, National Bureau of Economic Research, Inc.
    7. Olivier Ledoit & Michael Wolf & Zhao Zhao, 2016. "Efficient weighting: a more powerful test for cross-sectional anomalies," ECON - Working Papers 238, Department of Economics - University of Zurich, revised Feb 2018.
    8. Huang, Lin & Wang, Zijun, 2014. "Is the investment factor a proxy for time-varying investment opportunities? The US and international evidence," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 219-232.
    9. Goto, Shingo & Xiao, Gang & Xu, Yan, 2015. "As told by the supplier: Trade credit and the cross section of stock returns," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 296-309.
    10. repec:eee:ecofin:v:43:y:2018:i:c:p:169-205 is not listed on IDEAS
    11. Kewei Hou & Chen Xue & Lu Zhang, 2014. "A Comparison of New Factor Models," NBER Working Papers 20682, National Bureau of Economic Research, Inc.
    12. Belo, Frederico & Lin, Xiaoji & Yang, Fan, 2014. "External Equity Financing Shocks, Financial Flows, and Asset Prices," Working Paper Series 2014-08, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    13. Ashraf, Dawood & Felixson, Karl & Khawaja, Mohsin & Hussain, Syed Mujahid, 2017. "Do constraints on financial and operating leverage affect the performance of Islamic equity portfolios?," Pacific-Basin Finance Journal, Elsevier, vol. 42(C), pages 171-182.
    14. Li, Linda & Miller, David & Schmidt, Charles P., 2016. "Optimizing inventory׳s contribution to profitability in a regulated utility: The Averch–Johnson effect," International Journal of Production Economics, Elsevier, vol. 175(C), pages 132-141.
    15. Kewei Hou & Chen Xue & Lu Zhang, 2017. "Replicating Anomalies," NBER Working Papers 23394, National Bureau of Economic Research, Inc.
    16. Chen, Zhanhui, 2016. "Time-to-produce, inventory, and asset prices," Journal of Financial Economics, Elsevier, vol. 120(2), pages 330-345.

    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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