Do Productive Retailers Have Fewer Excess Inventory Announcements?

Abstract

Excess inventory announcement is an important issue as it has a huge negative impact on stock returns of the announcing firm. Many firms claim that they announce the buildup of excess inventory because of external factors such as sluggish sales. In contrast, theoretical literature in operations management implies that internal factors such as inventory productivity should drive excess inventory announcement. In this paper, we empirically analyze the determinants of excess inventory announcement in the U.S. retail sector. We examine if the firm’s internal operational efficiency, as measured by a) traditional inventory productivity metrics such as inventory turnover (IT) and b) overall productivity metrics such as total factor productivity (TFP), can explain the retailer’s excess inventory announcement. We use a combined dataset on excess inventory announcements and annual financial statements of publicly traded retailers in the U.S. between 1990 and 2011. As excess inventory announcement is a rare event, we employ the rare event logit regression to correct the bias caused by rare events. We find that productive retailers have a lower probability of announcing excess inventory in the following year. We also find that the overall operational productivity measure, i.e., TFP, is a better predictor of the buildup of excess inventory than are traditional inventory-specific efficiency measures such as IT and abnormal inventory turnover (AIT). Our results highlight the importance of tracking overall operational efficiency, rather than inventory-specific measures alone, because excess inventory announcement is driven by factors in multiple aspects.