Does Inventory Productivity Predict Future Stock Returns? A Retailing Industry Perspective

Abstract:     
Inventory forms one of the largest asset components and is a key management item for a retailer. We find that inventory productivity strongly predicts future stock returns among a sample of publicly listed U.S. retailers during the period from 1985 to 2010. A zero-cost long-short portfolio investment strategy, which consists of buying from the two highest and selling from the two lowest quintiles formed on inventory turnover, earns more than 1% abnormal return per month on average. Our results are robust to different measures of inventory productivity and are not driven by a particular sub-sample period. The return predictability of inventory productivity is also distinct from the well-known effects of size, book-to-market, momentum, accruals, operating leverage and capital investments. Our findings suggest that the stock market rewards retailers with high inventory productivity, which illustrates the importance of lean operations for a retailer’s long-run success.

Number of Pages in PDF File: 34

Keywords: Operations-finance interface, retail operations, inventory productivity, empirical asset pricing

working papers series