The Market Value of Inventory
44 Pages Posted: 25 Jun 2018
Date Written: May 2018
This paper investigates how supply chain management (SCM) efficiency affects the value investors attach to the change in a company’s inventory holdings. Based on a large number of U.S. firms from 1971 to 2013, we find that, on average, one dollar of inventory change is valued at $0.507 in the stock market. Decomposition into normal and abnormal inventory changes reveals that the market value of one dollar of abnormal inventory change is 43% smaller than that of normal inventory change, where a normal change moves the inventory balance to an estimated optimal level, and an abnormal change refers to the gap between actual inventory change and the estimated optimal change. We also investigate inventory turnover and gross margin and find economically and statistically significant relations between these proxies for efficient SCM and the value the market attaches to inventory changes. Finally, we find that the market attaches a higher value to inventory changes of firms with better growth prospects, higher sales predictability, and tighter financial constraints.
Keywords: Market Value of Inventory Holdings; Abnormal Inventory; Supply Chain Management
JEL Classification: M41
Suggested Citation: Suggested Citation