Market Reaction to Abnormal Inventory Growth: Evidence for Managerial Decision-Making: Evidence for Managerial Decision-Making

George Huston, Kirsten Cook, Michael R. Kinney, Jeffery S. Smith

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

Prior research demonstrates that manufacturing firms increase production (relative to sales) to transfer fixed costs from cost of goods sold (COGS) to inventory accounts, thereby increasing income to reach or surpass earnings thresholds. We examine how the market reacts to this earnings management strategy. We find that investors respond positively to inventory growth based on an expectation of increased future sales; however, this signal is weaker for inventory manipulators. Further, the market premium from meeting or beating analyst earnings forecasts by manipulating inventory is smaller than the premium for achieving this threshold absent inventory manipulation or through accrual manipulation. Finally, we examine firms considered to be ‘‘serial’’ inventory manipulators, finding that the market consistently discounts earnings beats for these firms, suggesting that inventory manipulation erodes investor confidence in firms’ earnings. Collectively, our results provide new insights into a challenge facing operations managers and finance managers in manufacturing firms.

Original languageEnglish
Pages (from-to)31-50
Number of pages20
JournalJournal of Management Accounting Research
Volume34
Issue number1
DOIs
StatePublished - 2022

Keywords

  • Abnormal inventory growth
  • Earnings management
  • Managerial manipulation
  • Manufacturing
  • Market reaction

Fingerprint

Dive into the research topics of 'Market Reaction to Abnormal Inventory Growth: Evidence for Managerial Decision-Making: Evidence for Managerial Decision-Making'. Together they form a unique fingerprint.

Cite this