Inventory changes and future returns
Thomas, Jacob K.
Date of Issue2002
College of Business (Nanyang Business School)
We find that the negative relation between accruals and future abnormal returns documented by Sloan (1996) is due mainly to inventory changes. We propose three explanations for this result, derived from the prior literature, but find evidence inconsistent with all three explanations. To assist future investigations in formulating additional explanations, we document several empirical regularities for extreme inventory change deciles. We speculate that demand shifts explain our results, and examine the feasibility of alternative reasons for the stock market's apparent inability to recognize the impending profitability reversals. Our evidence is consistent with earnings management masking the implications of demand shifts.
Review of accounting studies
© 2002 Kluwer Academic Publishers. This is the author created version of a work that has been peer reviewed and accepted for publication by Review of Accounting Studies, Kluwer Academic Publishers. It incorporates referee’s comments but changes resulting from the publishing process, such as copyediting, structural formatting, may not be reflected in this document. The published version is available at: [http://dx.doi.org/10.1023/A:1020221918065].