Inventory Growth and Future Performance: Can It Be Attributed to Risk?

October 09, 2013
  • Contributors:

    Francesco Momente, Francesco Reggiani, Scott A. Richardson
  • Topic:

    Other Research

Working paper

In this paper we use information external to the firm to condition forecasts of future firm performance. Starting with the well-known negative relation between inventory growth and future firm performance, we find that the strength of this relation is attenuated when related firms are also engaging in contemporaneous investment activity.

Based on a sample of 555,696 U.S. firm-months from 1988 through 2010, we find that knowledge of investment decisions in related firms helps to condition the negative relation between inventory growth and future firm performance. We use the Bureau of Economic Analysis's industry-level "make" and "use" tables — standard data about how raw materials are distributed among different sectors of the economy — to construct an industry-level input-output linkage table. When firms in related industries as identified by this input-output table experience contemporaneous relative growth (contraction) in their respective asset base, the negative relation between inventory growth and future firm performance for the firm is much weaker (stronger).

By using information external to the firm it is possible to identify potentially exogenous determinants of accounting quality choices that can then be linked to other outcome variables such as cost of capital.

  • AQR Capital Management, LLC, (“AQR”) provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which has no control. In no event will AQR be responsible for any information or content within the linked sites or your use of the linked sites.

  • The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees.

    This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.

  • Certain publications may have been written prior to the author being an employee of AQR.