Inventory Changes and Future Returns

Thomas, Jacob K.; Zhang, Huai

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Inventory Changes and Future Returns

Review of Accounting Studies, Vol. 7, 1pp. 63-187, 2002

42 Pages Posted: 12 Jul 2010 Last revised: 14 Jul 2010

See all articles by Jacob K. Thomas

Huai Zhang

Nanyang Business School, Nanyang Technological University

Date Written: December 1, 2001

Abstract

We find that the negative relation between accruals and future abnormal returns documented by Sloan (1996) is due mainly to inventory changes. We propose three explanations for this result, derived from the prior literature, but find evidence inconsistent with all three explanations. To assist future investigations in formulating additional explanations, we document several empirical regularities for extreme inventory change deciles. We speculate that demand shifts explain our results, and examine the feasibility of alternative reasons for the stock market’s apparent inability to recognize the impending profitability reversals. Our evidence is consistent with earnings management masking the implications of demand shifts.

Keywords: Accruals, Earnings management, Market efficiency

JEL Classification: G14, M41, M43

Suggested Citation: Suggested Citation

Thomas, Jacob and Zhang, Huai, Inventory Changes and Future Returns (December 1, 2001). Review of Accounting Studies, Vol. 7, 1pp. 63-187, 2002, Available at SSRN: https://ssrn.com/abstract=295247