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The Inventory Growth Spread

Fisher College of Business Working Paper No. 201203-023

Charles A. Dice Center Working Paper No. 2012-023

53 Pages Posted: 22 Dec 2009 Last revised: 26 Nov 2012

Frederico Belo

University of Minnesota; National Bureau of Economic Research (NBER)

Xiaoji Lin

Ohio State University (OSU) - Fisher College of Business

Date Written: November 26, 2012

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.

Keywords: Cross-Sectional Asset Pricing, Stock Return Predictability, Q-theory, Accruals Anomaly

JEL Classification: E22, E23, E44, G12

Suggested Citation

Belo, Frederico and Lin, Xiaoji, The Inventory Growth Spread (November 26, 2012). Fisher College of Business Working Paper No. 201203-023. Available at SSRN: https://ssrn.com/abstract=1526726 or http://dx.doi.org/10.2139/ssrn.1526726

Frederico Belo (Contact Author)

University of Minnesota ( email )

19th Avenue South
Minneapolis, MN 55455
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Xiaoji Lin

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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