Inventory Signals

26 Pages Posted: 16 May 2005 Last revised: 6 Feb 2012

See all articles by Richard K. Lai

Richard K. Lai

The Wharton School, Univ. of Pennsylvania

Date Written: June 25, 2006

Abstract

How does operational competence translate into market value, when firms cannot credibly communicate their competence to the market? I consider the example of inventory and fill rates. When the market sees a high-inventory firm, it cannot tell whether the inventory is due to incompetence or a strategy to enhance fill rate. Firms might decide to signal their competence to the market by carrying less inventory. I show conditions for separating and pooling perfect Bayesian equilibria. I also provide empirical evidence for this theory that inventory has a signaling role. The theory could potentially provide a framework that describes one way in which a range of operational competences such as purchasing and outsourcing, translate to market value. Practically, it has implications for firms, such as how to strategically communicate to the market, reward managers, or even whether to go public and be subject to market pressures.

Keywords: Inventory, signaling, operations management, asymmetric information

JEL Classification: D24, D82, M11

Suggested Citation

Lai, Richard K., Inventory Signals (June 25, 2006). Harvard NOM Research Paper Series No. 06-09. Available at SSRN: https://ssrn.com/abstract=723381 or http://dx.doi.org/10.2139/ssrn.723381

Richard K. Lai (Contact Author)

The Wharton School, Univ. of Pennsylvania ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215 898 1630 (Phone)

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