Inventory Productivity and Stock Returns in Manufacturing Networks
32 Pages Posted: 25 Jul 2022
Date Written: May 12, 2022
We provide a novel, supply network-based perspective on inventory productivity and incentives for its improvement. Using data from 2003 to 2019, we find that inventory productivity reduces materially and statistically significantly for firms located upstream in the supply network, and increases for highly connected and central firms. Firms with high inventory productivity show high equity valuations and abnormal returns, with both valuations and abnormal returns amplified for upstream, less connected and less central firms. Moreover, the difference in valuations and abnormal returns between best and worst performing firms is greater upstream, suggesting that financial markets offer outsized rewards for improving inventory productivity to upstream firms. We show that the information about firm's position within the network is a valuable predictor of its inventory productivity and financial performance. For operations managers and firm executives, our results highlight strong incentives for inventory productivity improvement upstream in the supply network. For investors, we show that supply network position data can sharpen inventory-based arbitrage opportunities.
Keywords: Inventory Productivity, Supply Network, Abnormal returns, Manufacturing, Empirical Study
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