The Predictive Power of Abnormal Inventory Growth: Application to Earnings Forecasting for Retailers

38 Pages Posted: 25 Jan 2010 Last revised: 19 Sep 2012

See all articles by Saravanan Kesavan

Saravanan Kesavan

University of North Carolina Kenan-Flagler Business School

Vidya Mani

University of North Carolina (UNC) at Chapel Hill - Operations Area

Date Written: February 12, 2010

Abstract

In this paper we test the predictive power of abnormal inventory growth to forecast retailers’ earnings. We demonstrate an inverted-U relationship between abnormal inventory growth and one-year ahead earnings per share for retailers. We find this relationship to be robust to different measures of abnormal inventory growth obtained from operations management literature. Our results also show that equity analysts do not fully incorporate the information contained in abnormal inventory growth in their earnings forecasts resulting in systematic biases in their earnings’ forecasts. We show that incorporating this information in analysts’ forecasts would improve their forecast accuracy. This improvement can be as much as 15.08% for overinventoried retailers that are identified based on previous year’s abnormal inventory growth.

Keywords: Retailing, Econometric Analysis, OM - Accounting Interface

JEL Classification: M43

Suggested Citation

Kesavan, Saravanan and Mani, Vidya, The Predictive Power of Abnormal Inventory Growth: Application to Earnings Forecasting for Retailers (February 12, 2010). Available at SSRN: https://ssrn.com/abstract=1541141 or http://dx.doi.org/10.2139/ssrn.1541141

Saravanan Kesavan (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

300 Kenan Center Drive
Chapel Hill, NC 27599
United States

Vidya Mani

University of North Carolina (UNC) at Chapel Hill - Operations Area ( email )

300 Kenan Center Drive
Chapel Hill, NC 27599
United States

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