Review of Accounting Studies

, Volume 7, Issue 2, pp 163–187

Inventory Changes and Future Returns

  • Authors
  • Jacob K. Thomas
  • Huai Zhang
Article

DOI: 10.1023/A:1020221918065

Cite this article as:
Thomas, J.K. & Zhang, H. Review of Accounting Studies (2002) 7: 163. doi:10.1023/A:1020221918065

Abstract

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.

inventory changesmarket efficiencyearnings management

Copyright information

© Kluwer Academic Publishers 2002