Accounting-Based Incentives Can Induce Cyclical Inventory Build-Ups

17 Pages Posted: 23 May 2017

See all articles by Marat Salikhov

Marat Salikhov

New Economic School; SKOLKOVO Moscow School of Management

Paul Parker

School of Business, University of Kansas

Jurgen Mihm

INSEAD

Dana Popescu

INSEAD - Technology and Operations Management

Nils Rudi

INSEAD - Technology and Operations Management

Date Written: May 23, 2017

Abstract

It is well established that accounting based incentive schemes can induce managers to adapt their behavior to manipulate accounting metrics even if such behavior is not in the best interest of the firm. Using a parsimonious model, this paper establishes how common accounting based bonus schemes can induce a manager to delay write-off decisions and keep excess inventory. In particular, it suggests a cyclical pattern where excess inventory is gradually built-up and then written off and discarded all at once.

Keywords: Accounting, Operations Management, Inventory Management, Inventory Write-offs

Suggested Citation

Salikhov, Marat and Parker, Paul and Mihm, Jurgen and Popescu, Dana and Rudi, Nils, Accounting-Based Incentives Can Induce Cyclical Inventory Build-Ups (May 23, 2017). INSEAD Working Paper No. 2017/34/TOM, Available at SSRN: https://ssrn.com/abstract=2972482 or http://dx.doi.org/10.2139/ssrn.2972482

Marat Salikhov

New Economic School ( email )

100A Novaya Street
Moscow, Skolkovo 143026
Russia

HOME PAGE: http://www.nes.ru

SKOLKOVO Moscow School of Management ( email )

1st km of Skolkovo highway
Odintsovsky District
Moscow 115035
Russia

Paul Parker

School of Business, University of Kansas ( email )

1654 Naismith Dr
Lawrence, KS 66045
United States

Jurgen Mihm

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Dana Popescu (Contact Author)

INSEAD - Technology and Operations Management ( email )

Boulevard de Constance
77 305 Fontainebleau Cedex
France

Nils Rudi

INSEAD - Technology and Operations Management ( email )

Boulevard de Constance
77 305 Fontainebleau Cedex
France

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