|Copy reference link||DOI: 10.1080/00207543.2016.1157273|
Abstract: This study analyses inventory reductions as a means of short-term financing of firms under financial distress. We use quarterly panel data of U.S. manufacturing firms for the period from 1995 to 2007. We identify a sample of 198 distressed firms for which we analyse changes in relative inventory. Approximately 70% of distressed firms reduce their inventories until the end of their individual distress periods. This decrease corresponds to a mean reduction of 18.7 inventory days or 9.4%. Additional regression analyses show that differences in inventory adjustments depend on pre-distress inventory performance, firm size, and turnaround strategy. We also compile a sample of 142 firms that defaulted to analyse inventory actions of unsuccessful turnarounds. Our findings indicate that defaulting firms also reduce their inventories but that the reductions are lower than those of firms that resolve their financial distress. We conclude that distressed firms use short-term inventory adjustments to free up cash and to achieve long-term efficiency gains from inventory optimisation. Our findings suggest that inventory optimisation is an essential part of a complete and successful turnaround strategy and financially distressed firms should always consider this action as a means to prevent bankruptcy.
|Copy reference link||DOI: http://dx.doi.org/10.1016/j.jom.2013.05.002|
Abstract: This paper investigates the relationship between the inventory dynamics and long-term stock returns of a large panel of U.S. manufacturing firms over the time period from 1991 to 2010. We propose two measures of inventory dynamics: one metric to assess the fluctuations of quarterly inventories within the year and a second metric to quantify relative year-over-year inventory growth. Our results indicate that within-year inventory volatility (IV) and abnormal year-over-year inventory growth (ABI) are associated with abnormal stock returns. Both metrics cannot be entirely explained by common risk factors. We find that firms with high IV and low ABI have the best long-term stock returns, and that stock performance decreases monotonically with higher ABI values. Our results are robust to various control variables including size, book-to-market value, industry and prior performance. We therefore conclude that changes in inventory levels provide valuable insights into the risks and opportunities faced by a company.
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