Abstract

Investors use sales surprise or revenue surprise (the degree to which actual sales exceed expected sales) as an important component of firm valuation. Rapidly scaling operations in the short-run to meet higher than expected demand, however, could increase adjustment costs and lower efficiency, thereby lowering performance. Operational slack (excess capacity internally in the firm and longer cash-conversion cycles externally in the supply chain) and volume flexibility could help mitigate the negative effect of sales surprise on firm performance. Based on a sample of 1286 firms representing 38,473 firm-quarter observations from 2003 to 2013, and using fixed-effects regression, the proposed relationships, except for mitigating effects of internal operational slack (or, excess capacity measured as standardized industry-adjusted Sales to PPE ratio) are supported for short-term performance (ROA). Findings are robust to long-term firm performance outcomes (Tobin's Q and market-to-book ratio), to controlling for autoregressive effects of past sales surprise, alternate proxies for firm size, squared-term specification for slack, an alternate forecasting method for sales surprise, and controlling for inventory efficiency.

Full Text
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