The Inverse Hockey Stick Effect

An Empirical Investigation of the Fiscal Calendar’s Impact on Firm Inventories

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Kühne Logistics University
Grosser Grasbrook 17, 20457 Hamburg

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Prof. Dr. Kai Hoberg

Professor of Supply Chain and Operations Strategy & Head of Department of Operations and Technology

Kühne Logistics University - KLU

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In this paper, we empirically investigate how manufacturers’ inventory decisions do relate to the fiscal calendar. While optimal firm inventories should depend on demand and supply, we find that inventory dynamics are frequently driven by the artificial accounting construct of the fiscal year. In an effort to manage earnings and cash flows towards the fiscal year end (FYE) we observe that firms significantly reduce inventories in the fourth fiscal quarter only to subsequently increase inventories in the next fiscal year. Based on a sample of 6,357 manufacturing firms, we find that inventories are on average 4.2% to 8.4% lower in the fourth fiscal quarter. Even after controlling for endogeneity, firms do show lower inventory levels at the FYE. Since we observe the inverse pattern compared to sales we refer to this phenomenon as inverse hockey stick effect. The effect holds for all three individual inventory components, i.e. raw materials, work-in-process, and finished goods. However, the magnitude of reductions in raw material (6.6%) and work-in-progress inventories (11.3%) suggests that effects other than sales timing are relevant. We find that inventory reductions in the fourth fiscal quarter are particularly accentuated if firms are in financial distress situations or have an incentive to beat cash flow targets. In contrast to our expectations, we don’t find evidence that firm size can be linked to inventory reductions at the FYE.

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more info about Prof. Dr. Kai Hoberg

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The KLU research seminar series is a regular meeting of PhD students, Post-Docs and professors who conduct research in the field of logistics and supply chain management. The research seminar is open to the public and we happily welcome guests.