Inventory Decisions and Signals of Demand Uncertainty to Investors

30 Pages Posted: 31 Aug 2012 Last revised: 28 Aug 2016

Guoming Lai

University of Texas at Austin - Red McCombs School of Business

Wenqiang Xiao

New York University (NYU) - Department of Information, Operations, and Management Sciences

Date Written: August 30, 2012

Abstract

This paper examines how managerial short-termism can affect a firm's inventory decision when external investors have only partial information about the firm's demand uncertainty. We first study the scenario where the manager's short-termism is exogenously given. We derive the full equilibrium spectrum ranging from stable separating to pooling equilibria, which yields insights for learning firms' demand uncertainty from their inventory and sales information and for understanding the effect of managerial short-termism on firm performance. We then analyze the scenario where the manager's short-termism is endogenous. We find that, unlike the scenario with exogenous short-termism, the first-best inventory decisions might be achieved in equilibrium on the basis of an alternative signal.

Keywords: Short-termism, Market Valuation, Newsvendor, Signaling, Demand Uncertainty

Suggested Citation

Lai, Guoming and Xiao, Wenqiang, Inventory Decisions and Signals of Demand Uncertainty to Investors (August 30, 2012). Available at SSRN: https://ssrn.com/abstract=2139102 or http://dx.doi.org/10.2139/ssrn.2139102

Guoming Lai (Contact Author)

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

Wenqiang Xiao

New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )

44 West Fourth Street
New York, NY 10012
United States

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