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Inventory Signals

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  • Lai, Richard

Abstract

How does operational competence translate into market value, when firms cannot credibly communicate their competence to the market? I consider the example of inventory and fill rates. When the market sees a high-inventory firm, it cannot tell whether the inventory is due to incompetence or a strategy to enhance fill rate. Firms might decide to signal their competence to the market by carrying less inventory. I show conditions for separating and pooling perfect Bayesian equilibria. I also provide empirical evidence for this theory that inventory has a signaling role. The theory could potentially provide a framework that describes one way in which a range of operational competences such as purchasing and outsourcing, translate to market value. Practically, it has implications for firms, such as how to strategically communicate to the market, reward managers, or even whether to go public and be subject to market pressures.

Suggested Citation

  • Lai, Richard, 2006. "Inventory Signals," MPRA Paper 4753, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:4753
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    References listed on IDEAS

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    Cited by:

    1. Anandasivam Gopal & Guodong (Gordon) Gao, 2009. "Certification in the Indian Offshore IT Services Industry," Manufacturing & Service Operations Management, INFORMS, vol. 11(3), pages 471-492, December.
    2. Gérard P. Cachon & Marcelo Olivares, 2010. "Drivers of Finished-Goods Inventory in the U.S. Automobile Industry," Management Science, INFORMS, vol. 56(1), pages 202-216, January.
    3. Tribó, Josep A., 2009. "Firms' stock market flotation: Effects on inventory policy," International Journal of Production Economics, Elsevier, vol. 118(1), pages 10-18, March.
    4. Kevin B. Hendricks & Vinod R. Singhal, 2009. "Demand-Supply Mismatches and Stock Market Reaction: Evidence from Excess Inventory Announcements," Manufacturing & Service Operations Management, INFORMS, vol. 11(3), pages 509-524, September.
    5. Guoming Lai & Wenqiang Xiao & Jun Yang, 2012. "Supply Chain Performance Under Market Valuation: An Operational Approach to Restore Efficiency," Management Science, INFORMS, vol. 58(10), pages 1933-1951, October.

    More about this item

    Keywords

    Inventory; signaling; operations management; asymmetric information;

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management

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