Can Global Sourcing Strategy Predict Stock Returns?

Abstract

In this study, we empirically test the proverbial notion that global supply chains are associated with shareholder value creation as they enable firms' to better serve demand by combining the best of offshore and onshore suppliers. We find that information concerning firms' global sourcing strategy (GSS) strongly predicts their future stock returns. Using a transaction-level imports dataset for the period 2008 to 2019, we measure US public firms' five GSS choices: the extent of global sourcing; supplier relationship strength; supplier concentration; sourcing lead time; and sourcing countries' logistical efficiency. For each of the five measures, we examine returns of a zero-cost investment strategy of buying from the highest and selling from the lowest quintile of that measure. Collectively these investment strategies yield an average annual four-factor alpha of 6% to 9.6% with value-weighted portfolios, and 6% to 13.9% with equal-weighted portfolios. These measures exhibit incremental return predictability over other operations-motivated return predictors such as inventory turnover and cash-conversion cycle and their return predictability is persistent across different supply chain positions, and their predictive power is robust to alternate risk models, sample construction, inventory measures, and empirical specifications. Together, these results indicate that the GSS measures embody independent information about firms' future profitability, a likely explanation for their return predictability power. In accordance, we find that the GSS measures are predictive of firms' future earnings surprises and abnormal returns around the earnings announcement days.