Demand-Supply Mismatches and Stock Market

Accepted Article
Accepted Manuscript
Title: Demand-Supply Mismatches and Stock Market Performance: A
Retailing Perspective
Authors: Kristoph K. R. Ullrich, Sandra Transchel
DOI: https://doi.org/doi:10.1111/poms.12687
Reference: POMS 12687
To appear in: Production and Operations Management
Please cite this article as: Ullrich Kristoph K. R., et al., Demand-Supply
Mismatches and Stock Market Performance: A Retailing Perspective. Production and
Operations Management (2017), https://doi.org/doi:10.1111/poms.12687
This article has been accepted for publication and undergone full peer review but has not
been through the copyediting, typesetting, pagination and proofreading process, which may
lead to differences between this version and the Version of Record. Please cite this article as
doi: 10.1111/poms.12687
Demand-Supply Mismatches and Stock Market
Accepted Article
Performance: A Retailing Perspective
Kristoph K. R. Ullrich*
Kühne Logistics University, Großer Grasbrook 17, 20457 Hamburg, Germany
E-Mail: kristoph.ullrich@the-klu.org
Ph: +49 40 328707-305; Fax: +49 40 328707-109
*Corresponding author
Sandra Transchel
Kühne Logistics University, Großer Grasbrook 17, 20457 Hamburg, Germany
E-Mail: sandra.transchel@the-klu.org
Ph: +49 40 328707-256; Fax: +49 40 328707-209
This article has been accepted for publication and undergone full peer review but has not been
through the copyediting, typesetting, pagination and proofreading process, which may lead to
differences between this version and the Version of Record. Please cite this article as doi:
10.1111/poms.12687
This article is protected by copyright. All rights reserved.
Demand-Supply Mismatches and Stock Market
Accepted Article
Performance: A Retailing Perspective
Abstract
We provide empirical evidence that the volatility of inventory productivity relative to the
volatility of demand is a predictor of future stock returns in a sample of publicly listed U.S.
retailers over the period 1985-2013. This key performance indicator, entitled demand-supply
mismatch (DSM), captures the fact that low variation in inventory productivity relative to
variation in demand is indicative of the superior synchronization of demand- and supply-side
operations. Applying the Fama and French (1993) three-factor model augmented with a
momentum factor (Carhart 1997), we find that zero-cost portfolios formed by buying the two
lowest and selling the two highest quintiles of DSM stocks yield abnormal stock returns of
up to 1.13%. These strong market anomalies related to DSM are observed over the entire
sample period and persist after controlling for alternative inventory productivity measures
and firm characteristics that are known to predict future stock returns. Further, we reveal
that DSM is indicative of lower future earnings and lower sales growth and provide evidence
that the observed market inefficiency results from investors’ failure to incorporate all of the
information that inventory contains into the pricing of stocks.
Keywords
Retail operations; inventory dynamics; operations-finance interface
History
Received: December 2015; accepted: December 2016 by Nicole DeHoratius after two revisions

1 Introduction
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Simply operating more efficient and cost-effective supply chains is not sufficient to gain a sus-
tainable competitive advantage (Lee 2004). Rather, a company’s ability to respond quickly
to changes in demand or supply without stockpiling unnecessary inventory needs to be com-
plemented by cost efficiency. In the retailing industry, inventory accounts for, on average,
34% of total assets and 60% of current assets, with a mean value of US$ 519.7 M. There-
fore, retailers must manage inventories with the greatest caution. Excessive inventory stock
may lead to liquidity problems and future markdowns, whereas insufficient stock will lead
to lost sales, customer dissatisfaction (with all of its negative consequences), and premium
freight charges resulting from expedited shipments (Kesavan and Mani 2013). Given the
great importance of managing inventories in an efficient and effective manner, most retail-
ers have adopted modern supply chain and operations management concepts over the last
decades, which have led to widespread improvement in the management of inventories across
the retailing industry (e.g., Chen et al. 2007, Alan et al. 2014).
The great relevance of inventory management in retailing contexts also inspired schol-
ars to test and improve conventional inventory performance measurement methods (Gaur
et al. 2005, Rumyantsev and Netessine 2007a) and to empirically validate predictions from
inventory theory (Rumyantsev and Netessine 2007b, Bray and Mendelson 2012, Jain et al.
2014). In addition, scholars have shown that retailers indeed realized significant increases in
inventory productivity over the past years and attribute these improvements to the adoption
of concepts such as quick response, inventory pooling, and revenue management (e.g., Chen
et al. 2007). Despite increasing awareness of the importance of inventory management in

practice and in the scientific community, Sloan (1996), Kesavan et al. (2010), and Kesavan
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and Mani (2013) note that there is growing evidence that Wall Street investors do not lever-
age all of the information that inventory contains. In addition, as managerial bonus payments
are commonly tied to the stock market performance (Currim et al. 2012, Alan et al. 2014), it
is not only relevant to investors but also to managers whether the stock market appreciates
superior inventory management.
This explains the extensive effort by academics to determine whether operations man-
agement (OM) practices are related to stock market performance and whether OM-related
accounting information can be leveraged to predict stock returns. In their pioneering work,
Chen et al. (2005, 2007) investigate the development of firm-level inventories in the manu-
facturing and retailing industries and analyze whether abnormal inventories are indicative
of abnormal stock returns. The authors reveal that inventory holdings generally declined
during the 1981-2000 and 1981-2004 periods and that firms with abnormally high invento-
ries yield abnormally poor long-term stock returns. Although Chen et al. (2005) find that
manufacturing firms with slightly lower than average inventory holdings (deciles 4 and 3)
yield positive abnormal returns, Chen et al. (2007) do not find evidence that abnormally
low inventory holdings yield abnormal returns for retailers and wholesalers. Building upon
these findings, Steinker and Hoberg (2013) utilize a dataset of manufacturing firms over the
1991-2010 period and show that abnormal stock returns monotonically decrease in abnor-
mal year-over-year inventory growth and that abnormal stock returns increase in within-year
inventory volatility.
Kesavan et al. (2010) and Kesavan and Mani (2013) explore the impact of inventory-
related information on analysts’ earnings and sales forecasts. Kesavan et al. (2010) reveal

that including information on the cost of goods sold, inventory levels, and gross margins
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as endogenous variables in a sales forecast improves forecast accuracy, although analysts
typically do not consider all of this information. Kesavan and Mani (2013) complement the
finding that analysts fail to fully incorporate the information contained in past inventory
by providing evidence for an inverted U-shaped relationship between abnormal inventory
growth and one-year-ahead earnings, implying that inventories are necessary to capitalize on
(additional) demand but become detrimental once they exceed a certain point. Recently, Alan
et al. (2014) reveal that inventory productivity predicts the stock returns of publicly listed
U.S. retailers and that, despite its predictive power, investors fail to incorporate inventory
information into investment decisions.
Thus, the above literature suggests that investors do not explicitly analyze publicly avail-
able financial data to obtain information regarding firms’ OM. Interestingly, if such infor-
mation is announced to the major business press, investors do incorporate this information
in stock valuations (Hendricks and Singhal 2005, 2009, 2014). That pattern indicates that
investors consider major events related to firm operations in pricing stocks, but they fail to
predict them based on careful analysis of the available inventory data (Kesavan and Mani
2013). In particular, Hendricks and Singhal (2005, 2009, 2014) use event studies applied to
stock market and accounting data to study the effect of public announcements regarding sup-
ply chain management and OM on firm performance. Considering supply chain glitches, the
authors show that undersupply leads to significant declines in both current and future stock
returns and that oversupply is costly and causes obsolescence risk, as reflected in stock market
reactions. Hendricks and Singhal (2014) complement this finding by reflecting on their pre-
vious work and demonstrate that announcements related to excess inventory, compared with

announcements related to product introduction delays and production disruptions, clearly
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have the greatest effect on the equity volatility of companies.
In addition to OM scholars, accounting researchers also explore the predictive power
of inventory-related information. Bernard and Noel (1991) demonstrate that unexpected
changes in the raw materials and work-in-process inventories of manufacturing companies
are positive indicators of future sales, whereas the effect of inventory changes on future
earnings is essentially neutral. Regarding finished-goods inventory, the authors show that for
both manufacturers and retailers, unexpected changes in inventory are negative indicators
of future earnings, despite the presence of a countervailing positive relationship with future
sales. This result partially contrasts with that of Abarbanell and Bushee (1997), who find
only weak economic justification for a relationship between inventory and future earnings for
manufacturers; they do not establish such a relationship for retailers. Kesavan and Mani
(2013) reveal, in line with Sloan (1996), that analysts fail to reflect all of the information
contained in accruals, which leads to mispriced stocks, as implied by the abnormal returns of
the bottom and top deciles of portfolios formed based on accruals. This finding is particularly
important because subsequent research reveals through accrual decomposition that most of
the predictive power and hedge returns of accruals result from inventory components (Thomas
and Zhang 2002).
In this paper, we apply portfolio-based asset pricing methods to analyze whether retailers’
ability to manage inventory effectively (i.e., minimizing demand-supply mismatches) predicts
future stock returns. Driven by the fact that demand and supply variability are the primary
factors responsible for supply chain inefficiency, we develop a novel key performance indicator
(KPI), entitled DSM (demand-supply mismatch), which measures the relative volatility of the

inventory productivity of a firm. Our KPI is supported by the extensive body of literature
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on the “Bullwhip effect,” which shows that unnecessarily amplified inventory volatility has
negative consequences along various dimensions (e.g., Lee et al. 1997, Warburton 2004, Chen
and Lee 2012, Cui et al. 2015). In contrast to prior studies that relate inventory productivity
measures directly to financial metrics (Gaur et al. 2005, Cannon 2008, Alan et al. 2014) or
that normalize inventory productivity by an industry peer’s performance (Chen et al. 2005,
2007, Kesavan and Mani 2013), our DSM measure accounts for the volatility of inventory pro-
ductivity over time. Knowing that higher demand volatility causes higher inventory volatility,
we normalize the volatility of inventory productivity by the volatility of demand. This rela-
tive volatility measure provides additional and distinct insights into how well firms can match
demand with supply. In practice, many managers benchmark their inventory productivity
(e.g., inventory turnover) against industry standards on an annual basis. Suppose a firm has
an (annual) average inventory turnover that is equal to the industry benchmark; the typical
assumption in such a case is that the firm’s operations are well managed. If, however, the
volatility of the inventory turnover of that firm is considerably higher relative to its demand
volatility, then the firm may face some periods with excessively high inventories and others
with stockouts. As such, our measure of DSM overcomes the problem that average measures
of inventory productivity smooth out important information.
Similar to prior research demonstrating that inventory productivity is indicative of future
stock returns (Alan et al. 2014), we show that the information content in the relative volatil-
ity of inventory productivity is an additional predictor of future stock returns. We find that
zero-cost portfolios formed on this inventory-productivity-to-demand-volatility ratio generate
abnormal returns of up to 1.13%. We consider different measures of inventory productiv-

ity, including inventory turnover and inventory days, and show that both measures lead to
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qualitatively similar results. Consistent with the literature regarding the bullwhip effect, we
approximate DSM further as the volatility of purchases/orders relative to the volatility of
demand. The results we obtain from that alternative operationalization confirm a negative
relationship between demand-supply mismatches and stock market performance.
The remainder of this paper is structured as follows: In §2, we present our research setup,
derive our measure of DSM, describe the data, and elaborate on our portfolio formation
methodology. In §3, we present the results from the portfolio formation and perform addi-
tional robustness checks. In §4, we provide potential explanations for the observed market
inefficiency, and in §5, we explore the implications of our work, discuss the limitations of our
study, and propose directions for future research.
2 Research Setup
2.1 Relative Inventory Productivity Volatility Measure (DSM)
Throughout the paper, we use the following notations to account for time-specific (fiscal
year t = 1, . . . , 29 and quarter q = 1, . . . , 4) and company-specific (i = 1, . . . , 424) effects.
Accordingly, for fiscal year t, quarter q, and firm i, we denote ending inventory as IN Vitq , sales
revenue as SALitq , and cost of goods sold as COGSitq . Contingent on the valuation method
for inventory – first-in, first-out (FIFO) or last-in, first-out (LIFO) – artificial differences in
the reported ending inventories and cost of goods sold may occur. Therefore, prior research
suggests adding the LIFO reserve to the ending inventory and subtracting the annual change
in the LIFO reserve (LIF Oit − LIF Oi,t−1 ) from the cost of goods sold (Kesavan et al. 2010,

Kesavan and Mani 2013, Alan et al. 2014). Because the LIFO reserve is only reported on
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an annual basis, we incorporate the valuation peculiarities into our quarterly measures as
follows. We define inventory turnover as

1 1 1
ITitq ≡ (COGSitq − LIF Oit + LIF Oi,t−1 )/(IN Vitq + LIF Oit ) (1)
4 4 4
and, analogously, inventory days over a quarter of 90 days as

1 1 1
IDitq ≡ 90 (IN Vitq + LIF Oit )/(COGSitq − LIF Oit + LIF Oi,t−1 ) .1 (2)
4 4 4
Prior research that investigates the relationship between inventory management and firm per-
formance relates inventory turnover and gross margin – capital intensity – and sales surprise-
adjusted inventory turnover directly to financial metrics (Gaur et al. 2005, Cannon 2008,
Alan et al. 2014) or normalizes inventory productivity by an industry peer’s performance to
obtain measures of abnormal inventory and abnormal inventory growth (Chen et al. 2005,
2007, Kesavan and Mani 2013). Our metric captures another aspect of inventory perfor-
mance by incorporating the variability of inventory productivity over time and relating it to
the variability of demand. We do not use the volatility of the inventory levels because the
majority of firms face seasonal swings in demand, which induce a natural seasonal pattern
in inventory levels. To incorporate the fact that the levels of inventory productivity may
vary among firms, for instance depending on the inventory objectives, we use the coefficient
of variation (CV) of the inventory productivity as the base volatility measure. The CV of
1
All of the subsequently presented results remain qualitatively unchanged even without the LIFO-FIFO
adjustment.

inventory productivity relates the standard deviation of the inventory productivity to its
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mean. In addition, we incorporate the fact that those firms that face higher demand volatil-
ity (naturally) hold higher inventory levels (safety stocks). Therefore, we relate the CV of
inventory productivity to the CV of demand to account for the market conditions under
which inventory needs to be managed efficiently.
Specifically, we operationalize DSM as the CV of inventory productivity relative to the
CV of demand on the basis of four quarterly observations, i.e.,
CV (inventory productivity)
DSM ≡ . (3)
CV (demand)
We employ inventory turnover and inventory days as proxies for inventory productivity, and
demand is approximated by sales.2 For notational convenience, we define DSM IT SAL ≡

CV (IT ) CV (ID)
CV (SAL)
and DSM IDSAL ≡ CV (SAL)
. For example, using the CV of inventory turns relative
to the CV of sales, DSM IT SAL of firm i in year t is computed as follows:
s 2   
4 4 4
1 1
P P
ITitq − ITitk
P
 4 4  1/4 SALitk 
 q=1 k=1  k=1

DSMitIT SAL ≡
 4
 s
 2  .

P 4 4
 1/4 ITitk  1 P
SALitq − 14
P
SALitk

k=1 4
q=1 k=1
The computation of DSM IDSAL follows accordingly.
Prior studies analyze annual data and employ the fiscal year-end inventory rather than
the average inventory to determine inventory productivity measures. Using quarterly data
to calculate an annual inventory productivity metric (DSM) therefore follows the principles
2
Using COGS to proxy for demand, as is common in the OM literature (e.g., Cachon et al. 2007, Kesavan
et al. 2010, Bray and Mendelson 2012, Chen and Lee 2012, Jain et al. 2014), does not meaningfully change
the results.

of OM theory and standard OM textbooks (e.g., Cachon and Terwiesch 2013, pp. 10-23).
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Steinker and Hoberg (2013) utilize quarterly data to investigate the relationship between
inventory volatility and financial performance in manufacturing industries. The authors
deseasonalize the inventory time series to obtain a measure of inventory volatility; however,
we do not filter out the seasonal component, as our measure intends to capture a firm’s
capability to respond “smoothly” to all sources of sales fluctuations in terms of inventory,
including seasonality. Hence, DSM measures the degree to which a firm under- or overreacts
in making adjustments to inventory in response to changes in demand patterns.
Table 1: Example of DSM
Period IT SD(IT) Mean(IT) CV(IT) SAL SD(SAL) Mean(SAL) CV(SAL) DSMIT SAL
Firm A
t=1 4 1.66 5.5 0.30 120 16.33 100 0.16 1.88
t=2 6 1.66 5.5 0.30 100 16.33 100 0.16 1.88
t=3 8 1.66 5.5 0.30 100 16.33 100 0.16 1.88
t=4 4 1.66 5.5 0.30 80 16.33 100 0.16 1.88
Firm B
t=1 5 0.5 5.5 0.09 120 16.33 100 0.16 0.56
t=2 6 0.5 5.5 0.09 100 16.33 100 0.16 0.56
t=3 5 0.5 5.5 0.09 100 16.33 100 0.16 0.56
t=4 6 0.5 5.5 0.09 80 16.33 100 0.16 0.56
SD=standard deviation.
Table 1 provides a simplified numerical example using the CV of inventory turns relative
to the CV of sales as a measure of DSM (the concept does not change under an alternative
operationalization). Firm A and Firm B have identical sales time series and identical mean
inventory turnovers, but Firm A’s inventory is more volatile than Firm B’s inventory. This
table illustrates that if the variation in inventory turnover is low relative to a given level
of fluctuation in sales (i.e., there are fewer DSMs), then the DSM metric is low, which we

consider to be good (i.e., Firm B outperforms Firm A in terms of DSM).3 As such, the measure
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does not assess the efficiency of maintaining inventory stock relative to sales (i.e., inventory
turnover); rather, it relates the variation in relative inventory holdings (inventory dynamics)
to sales fluctuations. A firm will perform well in this regard if its demand- and supply-
side operations are well synchronized. Low fluctuation in inventory productivity metrics
relative to sales volatility is indicative of superior information-sharing practices, superior
and cross-functionally aligned planning and forecasting capabilities and a reliable supplier
and logistics network, which are all characteristics that fall into the domain of good SCM
practices (Mishra et al. 2013). Therefore, a high degree of demand-and-supply mismatches
may be symptomatic of operational inefficiencies that may continue into the future, causing
costs to rise and revenues to decrease.
In particular, on the revenue side of the earnings equation, DSMs can lead to lost sales
due to the unavailability of products, lower realized gross margins due markdowns of excess
inventory, poorer customer service, satisfaction, and loyalty, if the types of products that
customers demand are not available at the right time and place. On the cost side of the
earnings equation, DSMs can lead to increased expenditures due to penalties paid to cus-
tomers, expedited shipments, obsolete inventories and write-downs. Moreover, the loss of
credibility towards customers may require the firm to increase marketing and other public
relations-related expenditures, may increase the costs of raising capital because investors
ask less credible retailers for premiums, and lastly may decrease employees’ productivity as
a result of volatile workloads (e.g., Hendricks and Singhal 2005, Kesavan and Mani 2013).
Thus, the consequences of DSMs are likely to have negative effects on future sales growth
3
Note that the volatility of inventory productivity is not affected by ordering frequencies (e.g., the degree
of responsiveness). A simplified example is provided in Appendix A.

and future earnings. Considering many of these aspects, IHL Group (2015) estimates the
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cost of overstocks and out-of-stocks for U.S. retailers to be 3.2% and 4.1% of revenues, which
accumulate to US$ 123.4 B and US$ 129.5 B annually, respectively. Accordingly, we expect
that DSM contains valuable information for the analysis of firms when portfolio investment
decisions are made. Motivated by the voluminous amount of literature on the negative im-
pact of amplifying order/inventory variability on supply chain operations (Lee et al. 1997,
Chen and Lee 2012), we investigate whether the relative volatility of inventory productivity
is predictive of future stock returns.
Traditionally, the literature on the bullwhip effect relates order (rather than inventory)
variability to the demand variability. In line with this stream of research, we propose a
third proxy for DSM, which relates the CV of purchases to the CV of demand.4 Consistent
with prior research (e.g., Bray and Mendelson 2012, Larson et al. 2015), we operationalize
purchases (orders) of firm i in fiscal year t and quarter q as P U Ritq ≡ IN Vitq − IN Vit,q−1 +
CV (P U R)
COGSitq such that the third proxy for DSM can be defined as DSM P U RSAL ≡ CV (SAL)
. Be-
cause the computation of purchases requires two periods of data, it is clear that DSM P U RSAL
contains information from five periods if we determine the CV of purchases based on four sub-
sequent observations of purchases. Therefore, the information contained in DSM P U RSAL will
be, on average, 45 days older than the information contained in DSM IT SAL and DSM IDSAL ,
which may affect its predictive power.
In Figure 1a, we depict the inventory turnover, DSM IT SAL , and (annual) average stock
returns of Sears Holdings Corporation, one of the largest retailers by annual revenue in
the United States (2014: US$ 31,198 B). Figure 1b presents the mean-adjusted inventory
4
We thank an anonymous referee for proposing this measure to validate our results.

Figure 1: Sears Holding Corp.
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(a) Inventory turnover, DSM, and average stock returns
(b) Mean-adjusted inventory turnover, mean-adjusted DSM, and average stock returns

turnover, mean-adjusted DSM IT SAL , and (annual) average stock returns of the same com-
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pany. Inventory turnover and DSM do not behave identically, implying that the two measures
capture different aspects of operational performance and that DSM might be related to stock
market performance. For example, in the periods 1995-1997 and 2004-2006, inventory pro-
ductivity in terms of inventory turnover is rather low – compared to the firm average – which,
according to prior research (e.g., Alan et al. 2014), should be negatively related to stock re-
turns; however, we do not observe such a relationship during these two periods. In contrast,
the firm’s ability to reduce DSMs (as implied by low values of DSM IT SAL ) may explain the
relatively high stock returns observed during these periods. Therefore, we analyze whether
our DSM measure can be leveraged to predict future stock returns.
2.2 Data Description
For the purpose of this study, we collect financial data for U.S. public retailers during the
1983-2013 period. The sampling period is rooted in prior research (e.g., Rajagopalan and
Malhotra 2001), which finds that modern inventory management practices, such as just-in-
time, were primarily adopted in the 1980s; furthermore, it ensures a sufficiently large sample
size for the application of econometric methods.
We use three types of data: first, we extract quarterly financial data from Standard &
Poor’s COMPUSTAT -North

R American database for all publicly listed U.S. retailers, iden-
tified by the four-digit Standard Industrial Classification (SIC) code assigned to each firm
based on its primary industry segment. Public companies are obliged to provide GAAP-
compliant financial and operational information to enable investors to assess their perfor-
mance. Because we are particularly interested in the within-year dynamics of a supply chain,

to obtain our measure of DSM, we use quarterly rather than yearly data. Second, we com-
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bine quarterly data with monthly stock returns from the Center for Research in Security
Prices (CRSP) and data on common risk factors and monthly risk-free rates from the Fama-
French Portfolios and Factors database accessed through Wharton Research Data Services
(WRDS), which serve as the basis for the portfolio formation method. Quarterly financial
statements do not include information on inventory valuation methods and the associated
LIFO reserves. Therefore, we further obtain annual accounting information from Standard
& Poor’s COMPUSTAT -North

R American database.
The U.S. Department of Commerce classifies retailer categories and assigns four-digit
SIC codes if there is significant commonality among the product portfolios of these firms.
In line with prior empirical OM research that utilizes secondary data to analyze inventory
performance in retailing industries (e.g., Kesavan et al. 2010, Kesavan and Mani 2013, Alan
et al. 2014), we exclude retailers that are classified as eating and drinking establishments (SIC
5812-5813) and automotive dealers and service stations (SIC 5511-5599) because service is a
significant component of their business models. We also exclude some four-digit categories
for which inventories have little in common with the retailers in our sample, such as lumber
and other building materials dealers (SIC 5211) and SIC categories in which firms’ inventory
decisions may be largely dependent on economic conditions and raw material prices (e.g.,
jewelry stores, SIC 5944).
The initial extract of the annual data comprises 4,802 firm-year observations across 498
firms. We omit observations that have missing values on the variables COGS, sales, or
inventory and combine the data with quarterly observations. After these adjustments, our
final data set contains 15,951 firm-quarter observations across 424 firms. Table 2 provides a

Table 2: Sample description
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Description Segment Four-digit Examples of firms No. of firms No. of firm-
SIC code quarter obs.
General merchan- 53 5311, 5331, 5399 Wal-Mart, Costco, 90 3,373
dise stores Target, J.C. Penney
Grocery stores 54 5411 Kroger, Safeway, 75 3,142
Albertsons
Apparel and acces- 56 5600, 5621, 5651, GAP, Foot Locker, 112 5,355
sory stores 5661 Nordstrom
Radio, TV, con- 57 5731, 5734 Best Buy, Circuit 43 1,185
sumer electronics, City, CompUSA
and music stores
Catalog, mail-order 59 5961 Amazon.com, 104 2,896
houses, and online Buy.com, Systemax
retailers
Total 424 15,951
description of each segment and the corresponding SIC codes, provides examples of firms, and
presents the number of firms and the number of firm-quarter observations of each segment.
This data set is supplemented by monthly stock returns, which are required for the sub-
sequent analyses. Following the guidelines of Alan et al. (2014), we replace the stock return
with the delisting return if a stock return for a particular month is not available due to the
delisting of a firm; if neither the stock return nor the delisting return is available, we set the
stock return equal to the value-weighted market return. Firms that do not have stock return
information for any month in the CRSP are omitted. This approach provides the final data
set upon which our subsequent analyses are based. Table 3 presents the summary statistics
of the main variables that will be used throughout the paper.
2.3 Portfolio Formation
On the basis of portfolio-asset pricing models, we illustrate the financial implications of DSMs
over and beyond the financial benchmark. In the following, we explain the portfolio formation

Table 3: Descriptive statistics
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Variable name Notation Mean Median SD 10th 90th
perc. perc.
Sales (US$ M) SAL 4,036.31 725.14 12,333.32 84.91 9,778.14
Cost of goods sold (US$ M) COGS 2,955.50 492.09 9,565.44 48.83 6,919.54
Inventory (US$ M) IN V 474.16 89.28 1,405.19 10.40 1,154.66
Purchases (US$ M) PUR 707.05 128.51 1,682.18 12.10 1,841.08
Inventory turnover IT 6.59 4.80 9.32 2.46 11.83
Inventory days ID 20.71 18.95 13.59 7.25 36.99
Demand-Supply-Mismatcha DSM IT SAL 1.59 1.26 1.56 0.70 2.63
Demand-Supply-Mismatchb DSM IDSAL 1.50 1.16 1.74 0.67 2.45
Demand-Supply-Mismatchc DSM P U RSAL 1.28 1.02 1.05 0.48 2.25
SD=standard deviation; perc.=percentile; a DSM = CV (IT )/CV (SAL); b DSM = CV (ID)/CV (SAL);
c DSM = CV (P U R)/CV (SAL).
method and the underlying sequence of events. On July 31 in year t, we invest US$ 1 divided
equally in each firm of each portfolio. We weight each firm equally as opposed to applying
a value-weighting approach because giving more weight to larger firms such as Wal-Mart or
Best Buy could significantly influence the mean excess returns of the relatively small number
of firms in each portfolio and thus affect the generalizability of our findings.
To construct the portfolios on July 31 of each year t, we rank firms according to their
DSM value in ascending order and construct five quintiles using accounting information for
the fiscal period from February 1 of year t − 1 until January 31 of year t. As is standard in
the asset-pricing literature (Fama and French 1993), this method ensures that there is a time
gap of at least six months (January 31 of year t until July 31 of year t) for the accounting
information to be announced and absorbed by the market. The portfolios that are formed
on July 31 of each year t are liquidated on July 31 of each year t + 1, and new portfolios
are formed on the basis of the newly available accounting information. In addition to the
quintile portfolios, we also form zero-cost (also called long-short or arbitrage) portfolios;

these portfolios are formed by taking a US$ 1 long position in firms with low DSM values
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(i.e., quintiles one and two) and a US$ 1 short position in firms with high DSM values (i.e.,
quintiles four and five), thereby utilizing 80% of the sample firms.
As our sample period is from 1983 to 2013, it is obvious that we form the first portfolio
for the purpose of our analysis on July 31, 1985, and the last portfolio on July 31, 2012.
Whereas Fama and French (1993), who developed this method, utilize information from the
fiscal-period January 1 of year t − 1 until December 31 of year t − 1 to form portfolios on
June 30 of year t, we use the fiscal-year end cutoff date of January 31 to form portfolios on
July 31 of each year t. This approach is used because a sizable portion of retailers and the
majority of the firms in our sample (46.49%) have their fiscal-year end in January, implying
a 17-month information delay if we use the fiscal-year end cutoff date of December 31.
3 DSM and Stock Market Performance
In the following three sections, we first present the average excess returns (in excess of
the risk-free rates) of the portfolios based on our DSM metrics. Then, to test whether
the observed excess returns can be explained by commonly known risk factors, we apply
the Fama and French (1993) three-factor plus momentum (Carhart 1997) model. Finally,
we follow the Fama and MacBeth (1973) regression-based approach to test whether DSM
contains unique information after controlling for alternative inventory productivity measures
and firm characteristics that are known to predict stock returns.

3.1 Portfolio Excess Returns
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Table 4 shows the average monthly excess returns (in %) of equally weighted quintile portfolios
based on the proposed metrics. We find that there is a negative trend for DSM across all
of the portfolios, regardless of whether we consider the CV of inventory turnover, the CV of
inventory days, or the CV of purchases as a proxy for inventory productivity: that is, the
average monthly excess return decreases by portfolio rank; thus, DSM and stock returns are
negatively correlated. In addition to the excess returns of the quintile portfolios, Table 4 also
presents the zero-cost portfolio returns. These results indicate that firms with lower DSM
values tend to outperform those with higher values in terms of stock returns. For example,
the average monthly excess return of the zero-cost portfolio formed on DSM IT SAL by taking
a short position in quintiles four and five and a long position in quintiles one and two is 1.03%
(p < .01). It is noteworthy that this method of forming zero-cost portfolios is not based on
only firms with extremely high or low DSM values (or even driven by outliers); rather, it is
based on the utilization of 80% of the dataset and is, hence, a robust finding. Test statistics
for each of the quintiles and the zero-cost portfolio are reported below the average excess
returns.
Figure 2 presents the time series for the average excess returns of the zero-cost portfolios
based on DSM and, as such, provides support for the persistence of a proposed relationship
between DSM and subsequent stock returns. The time series does not indicate any systematic
variations over time. Analyzing the year-to-year performance of the zero-cost portfolios re-
veals that companies with low DSM values outperform those firms with high DSM values: for
DSM IT SAL and DSM IDSAL in 27 of 29 firm-year observations (> 93%) and for DSM P U RSAL

Table 4: Average monthly excess returns of quintile and zero-cost portfolios based on DSM
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Portfolio rank DSM IT SAL DSM IDSAL DSM P U RSAL
1 (low) 1.74%*** 1.76%*** 1.10%***
9.15 9.19 6.86
2 1.37%*** 1.09%*** 0.94%***
7.18 5.80 5.64
3 0.76%*** 0.93%*** 0.83%***
3.63 4.60 4.76
4 0.66%*** 0.78%*** 0.65%***
3.53 3.96 3.57
5 (high) 0.24% 0.27% 0.08%
0.95 1.04 0.42
Zero-cost 1.03%*** 0.88%*** 0.65%***
5.73 4.86 5.98
*p < .1, **p < .05, ***p < .01. T-statistics are reported below the average excess returns.
in 23 of 29 firm-year observations (> 88%), with the exception of some economically turbu-
lent years. Therefore, we conclude that our results are not driven by a particular subperiod
of our sample.
3.2 Portfolio Adjustment for Common Risk Factors
To investigate whether the DSM measure is only a proxy for common risk factors, we employ
the Fama and French (1993) three-factor plus momentum (Carhart 1997) model, according
to which the following regression explains the excess return of portfolio p in month m, ERpm ,
with p ∈ {1, 2, 3, 4, 5, zero-cost} and with m ∈ {1, . . . , 12}:
ERpm = αp + β1p RM RFm + β2p SM Bm + β3p HM Lm + β4p U M Dm + pm , (4)
where RMRF is the excess return (in excess of the risk-free rate) of the value-weighted market
return; SMB is the return of a zero-cost portfolio consisting of the return of a portfolio of big

Figure 2: Average excess returns of zero-cost portfolios based on DSM
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companies, in terms of market capitalization, subtracted from the return of a small-company
portfolio; HML is the return of a zero-cost portfolio of high book-to-market ratio stocks
minus the return of a portfolio of low book-to-market ratio stocks; and UMD is the return
of a zero-cost portfolio of the last year’s high-return portfolio subtracted from the return of
the last year’s low-return portfolio. The intercept αp is called the monthly abnormal return
of portfolio p because it reflects the expected value of the return in excess of the passive
investments of portfolio p if all of the other independent variables assume a value of zero.
Accordingly, it will not be different from zero if the aforementioned factors entirely explain
the excess return of portfolio p.
Table 5 presents the regression results of the asset-pricing framework explained above
across the different measures of DSM. We find a negative trend for αp in the quintiles’
rank order; specifically, we observe negative abnormal returns for quintiles five and four and

Table 5: Fama-French-Carhart four factor regression results for zero-cost and quintile port-
folios
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Portfolio α RmRf SM B HM L UMD R2
rank
DSM IT SAL
1 (low) 1.21%*** 0.96*** 0.56*** 0.23*** -0.28*** 57.57%
2 0.71%*** 1.11*** 0.59*** 0.34*** -0.34*** 63.12%
3 -0.01% 1.07*** 0.61*** 0.57*** -0.20*** 63.04%
4 -0.04% 1.15*** 0.78*** 0.47*** -0.38*** 65.98%
5 (high) -0.40%*** 1.01*** 1.02*** 0.41*** -0.38*** 58.50%
Zero-cost 1.13%*** -0.05** -0.32*** -0.16*** 0.06** 69.23%
DSM IDSAL
1 (low) 1.16%*** 1.00*** 0.64*** 0.28*** -0.31*** 58.64%
2 0.46%*** 1.13*** 0.49*** 0.24*** -0.30*** 61.28%
3 0.36%*** 1.06*** 0.63*** 0.38*** -0.39*** 61.18%
4 -0.04% 1.11*** 0.73*** 0.49*** -0.36*** 65.07%
5 (high) -0.38%*** 1.02*** 1.08*** 0.34*** -0.36*** 58.65%
Zero-cost 1.04%*** -0.02* -0.30*** -0.17*** 0.04* 68.03%
DSM P U RSAL
1 (low) 0.44%*** 1.03*** 0.47*** 0.27*** -0.23*** 58.20%
2 0.33%*** 1.04*** 0.61*** 0.14*** -0.32*** 66.37%
3 0.19%*** 1.06*** 0.69*** 0.35*** -0.32*** 65.24%
4 -0.03% 1.07*** 0.70*** 0.42*** -0.26*** 66.42%
5 (high) -0.59%*** 0.95*** 0.89*** 0.38*** -0.22*** 65.37%
Zero-cost 0.73%*** 0.02*** -0.25*** -0.19*** -0.03*** 68.19%
*p < .1, **p < .05, ***p < .01.
monotonically increasing positive abnormal returns in quintiles two and one. Table 5 also
presents the abnormal returns of the zero-cost portfolios. Contingent on the proxy for DSM,
we observe positive abnormal returns for the zero-cost portfolios while controlling for risk
factors; these returns range from 1.13% to 0.73%, all of which are statistically significant
(p < .01). These findings suggest that DSM explains future stock returns and is not just a
proxy for common risk factors.
Comparing the other factors across the portfolio ranks, we do not observe any systemic

patterns for RMRF, HML, and UMD. However, the coefficient of SMB tends to increase with
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the portfolio rank; that is, the factor loading of SMB is higher for firms that experience more
DSMs, suggesting that firms that experience many mismatches exhibit behavior similar to
that of small firms. This result partially contrasts with prior finance research, which finds
that smaller firms outperform larger firms in terms of stock market performance (the so-
called small-firm effect (e.g., Reinganum 1981)). However, the finding that smaller firms
tend to have more DSMs than larger ones is completely in line with OM theory. That is
because larger firms benefit from demand and inventory pooling, which can be subsumed
under the notion of “risk pooling” (e.g., Eppen 1979, Corbett and Rajaram 2006), and tend
to be more diversified. They are therefore less sensitive to demand or supply shocks in single
product branches (e.g., Hendricks and Singhal 2009), tend to have more operational and
financial flexibility as well as market power to cope with DSMs (e.g., Hendricks and Singhal
2009), and often have more financial resources available to make investments related to IT
infrastructure, which many suggest facilitates inventory management practices (Gaur et al.
2005, Hendricks and Singhal 2005, Mishra et al. 2013), all of which reduce the amount of
DSMs.
3.3 Distinctiveness of DSM
The above-used sorting approach has one major shortcoming: while it performs well in
determining whether portfolios formed on the basis of a particular variable (in our case,
DSM) yield abnormal stock returns, it cannot determine whether the variable upon which
portfolios are formed contains unique information. For example, Kesavan and Mani (2013)
identify a relationship between abnormal inventory growth and abnormal stock returns, and

Alan et al. (2014) show that adjusted inventory turnover predicts abnormal stock returns.
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Therefore, it remains unclear whether the information content in DSM is different from
other inventory-related factors that have been shown to predict abnormal stock returns. One
obvious question that follows from this shortcoming is whether the portfolio ranks assigned to
firms based on the proposed measures of DSM differ from those of existing metrics. To answer
this question, we follow Kesavan and Mani (2013) and define the abnormal inventory growth
of firm i in year t (AIGit ) as retailers’ annual inventory growth rates adjusted for several
covariates (such as COGS and gross margin of the recent period, and the previous period’s
COGS, inventory, accounts payable to inventory ratio, and capital investment) that prior
research has shown to affect stocking decisions (Gaur et al. 2005, Rumyantsev and Netessine
2007b, Kesavan et al. 2010). Unlike Kesavan and Mani (2013), we do not adjust retailers’
annual inventory growth rate by store growth and do not normalize scale-dependent variables
by the number of stores to preserve sample size. In line with Alan et al. (2014), we define the
adjusted inventory turnover of firm i in year t, AITit , as the deviation (residual) from each
retailer’s segment-specific average inventory turnover while controlling for the firm-specific
gross margin, capital intensity, and sales surprises. In Appendix B, we provide further details
regarding the construction of each of these variables.
In Table 6, we report in the lower triangle the percentage overlap of portfolio ranks across
alternative metrics. For example, the rank assigned to a firm based on AIT , denoted as
AITRank , is equal to the rank assigned to a firm based on DSM IT SAL , denoted as DSMRank
IT SAL
,
for 20.92% of the observations. The upper triangle of Table 6 presents the z-statistics of the
Wilcoxon signed-rank test. As expected, there is no statistically significant difference between
IT SAL IDSAL
DSMRank and DSMRank . The differences between portfolio ranks based upon all of the

Table 6: Percentage overlap of portfolio ranks formed on alternative metrics and z-statistics
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1 2 3 4 5
1 DSMIT SAL
Rank 1 -0.28 -7.46 14.65 -13.00
2 DSMIDSAL
Rank 71.16% 1 -7.32 15.02 -12.96
3 DSMPRank
U RSAL
25.09% 28.21% 1 27.11 -7.54
4 AIGRank 21.26% 21.63% 20.16% 1 -29.80
5 AITRank 20.92% 21.58% 19.24% 18.79% 1
Table 7: Correlation matrix
Variable 1 2 3 4 5
1 DSMIT SAL 1
2 DSMIDSAL 0.95 1
3 DSMP U RSAL 0.61 0.55 1
4 AIG -0.07 -0.05 -0.09 1
5 AIT 0.10 0.09 -0.04 -0.04 1
All of the reported correlation coefficients are significant at the 5% level.
other metrics are statistically significant, which provides some evidence that our proxies for
DSM capture different aspects of operational performance than do AIG and AIT .
Fama and French (2008) recommend the regression-based approach of Fama and MacBeth
(1973) to determine whether the information content of DSM is distinct from the information
contained in commonly known inventory metrics. A high correlation between DSM and AIG
and/or AIT might imply that DSM is just a proxy for one of these variables. Therefore, we
present in Table 7 the Pearson correlation coefficients of DSM, AIG, and AIT. All of these
measures are significantly correlated with one another (p < .05), implying that it might not
be clear whether the relationship between DSM and abnormal stock returns persists after
controlling for alternative inventory productivity metrics.
Hence, to account for the possibility that a combination of established inventory produc-

tivity metrics captures large portions of the variation in stock returns that we would attribute
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to DSM, we conduct cross-sectional regressions in the fashion of Fama and MacBeth (1973).
This approach facilitates testing whether DSM has predictive power after controlling for
known drivers of stock returns. Following their framework and remaining consistent with our
portfolio formation procedure, we first run monthly cross-sectional regressions from February
through January of retailer’s excess returns in each year against DSM and other anomaly
variables from the prior fiscal year. For example, we run regressions of each retailers’ excess
returns in February 2012 against these retailers’ DSMs computed from accounting informa-
tion released in the period from February 2011 to January 2012. After obtaining regression
coefficients for each of the cross-sectional regressions, of which we report the average in Ta-
ble 8, we calculate t-statistics that are based on the time-series standard deviations of the
monthly slopes.
In addition to AIG and AIT, we include a set of control variables in the regressions that
are also suggested to predict stock returns. The control variables are as follows: accruals,
IBit −OCFit −EIDOit

as measured by ACCit ≡ T Ai,t−1
, where IB, OCF, EIDO, and TA denote income
before extraordinary items, operating cash flows, extraordinary items and discontinued op-
erations, and total assets, respectively (Hribar and Collins 2002); asset growth, ASSGit , as
measured by the change in the natural logarithm of total assets from t − 2 to t − 1 (Fama
and French 2008); momentum, M OM 1im , as measured by the most recent one-month stock
return prior to the portfolio formation (Jegadeesh 1990); cumulative momentum, M OM 2im ,
as measured by the cumulative stock return from month m−12 to month m−2, not including
the return of m − 1 (Fama and French 2008); market capitalization, M Cit , as measured by
the natural logarithm of the market cap in January of t (Fama and French 2008); book-to-

market ratio, BT Mit , as measured by the natural logarithm of the ratio of the book equity
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for the last fiscal year-end in t − 1 divided by the market equity in December of t − 1 (Fama
N F Ait
and French 2008); operating leverage, as measured by OLit ≡ T Ai,t−1
, with TA denoting the
net fixed assets (e.g., Saunders et al. 1990, Alan et al. 2014); capital intensity, as measured
P P Eit
by CIit ≡ T Ait −IN Vit
(e.g., Jain et al. 2014); and inventory growth, IN V Git , as measured
by the change in ending inventory, deflated by total assets, from fiscal year t − 2 to t − 1
(Kesavan and Mani 2013). Finally, we control for the change in AIT, ∆AIT , measured as
the percentage change of AIT from t − 1 to t (Alan et al. 2014).
Each column in Table 8 relates to a different DSM measure. In columns (1)-(3), we use
each stock’s quintile rankings of DSM to allow a direct comparison with our portfolio results
and to mitigate the effect of extreme observations. For example, in column (1), the coefficient
of DSM relates to each stock’s quintile ranking of DSM IT SAL , DSMRank

IT SAL
, and equals -.003
(t=-2.345). All else being equal, this coefficient implies that a zero-cost portfolio formed on
DSM IT SAL by taking a short position in quintiles four and five and a long position in quintiles
h i
one and two yields, on average, a −.003 (1+2)−(4+5)
2
∗ 100 = 0.9% monthly excess return,
which confirms our findings in §3.2. Because the negative coefficient sign of DSM persists
along all of the rank operationalizations of DSM (columns (1)-(3)) and all of the continuous
measures of DSM (columns (4)-(6)), with only one exception of insignificance, we conclude
that the predictive power of the proposed inventory-productivity-to-demand-volatility ratio
prevails, despite controlling for other measures.
In line with Alan et al. (2014), our estimates confirm the positive relationship between
AIT and stock returns. Retailers that manage their inventories more efficiently than their
industry peers generate higher returns. Our results imply further a negative relationship

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Table 8: Average slopes and t-statistics from monthly cross-sectional regressions
DSM quintile rank Continuous DSM measures
Column 1 2 3 4 5 6
Variable IT SAL
DSMRank IDSAL
DSMRank P U RSAL
DSMRank DSM IT SAL DSM IDSAL DSM P U RSAL
Intercept 0.039*** 0.022* 0.019* 0.058*** 0.062*** 0.035**
2.853 1.932 1.741 4.626 4.662 2.160
DSM -0.003** -0.002** -0.002* -0.002* -0.002** -0.001
-2.345 -2.093 -1.661 -1.870 -1.995 -0.385
ACC -0.356*** -0.180*** -0.072*** -0.265*** -0.280*** -0.059***
-5.145 -5.339 -3.084 -5.392 -5.314 -2.609
ASSG -0.034*** -0.037*** -0.008 -0.025** -0.020** -0.002*
-2.660 -2.822 -0.603 -2.400 -2.055 -1.656
MOM1 -0.033*** -0.045*** -0.044* -0.018* -0.018* -0.046*
-2.969 -3.820 -1.658 -1.822 -1.862 -1.939
MOM2 0.002 0.005 0.002 0.001 0.001 0.006
0.649 1.339 0.369 0.331 0.314 0.960
MC -0.013*** -0.007*** -0.014*** -0.019*** -0.022*** -0.004**
-3.730 -2.958 -0.820 -4.109 -4.120 -1.980
BTM 0.000 0.001 0.004 0.001 0.001 0.003
0.101 0.289 1.478 0.721 0.797 0.759
OL -0.017 -0.009 -0.017 -0.018 -0.018 -0.010
-1.229 -0.721 -1.061 -1.545 -1.526 -0.553
CI 0.013 0.015 0.019 0.009 0.009 0.012
1.121 1.259 1.227 0.918 0.906 1.104
INVG -0.403*** -0.341*** -0.087* -0.404*** -0.412*** -0.122***
-4.124 -3.987 -1.741 -4.357 -4.349 -2.630
AIG -0.003 -0.002 -0.015 -0.006 -0.007 -0.006
-0.427 -0.285 -0.648 -0.833 -0.960 -0.336
AIT 0.010*** 0.008** 0.017* 0.015*** 0.015*** 0.008*
2.675 2.12 1.681 3.168 3.265 1.744
∆AIT 0.000 0.000 0.000 0.000 0.000 0.000
0.237 0.393 0.086 0.104 0.103 0.029
*p < .1, **p < .05, ***p < .01. This table shows average slopes from monthly cross-sectional regressions
to predict future stock returns. Below the coefficients, we report t-statistics that are based on time-series
standard deviations of the monthly slopes. To mitigate the influence of outliers, we have winsorized all
continuous independent variables at the .02-level.

between AIG and future stock returns, which follows prior research (Kesavan and Mani
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2013). That is, retailers that experience abnormally high inventory growth rates generate
lower stock returns. Overall, the results of the Fama and MacBeth (1973) regression-based
approach provide reassurance that DSM is a predictor of future returns and contains distinct
information from commonly known inventory metrics.
4 Explanations of the Market Anomaly
There are at least two potential explanations for the observed market inefficiency. The
first is information-based (labeled the “information story”), suggesting that the information
content of DSM might be indicative of near-term sales and earnings. That is, DSM contains
information about how effectively (in terms of supply) the firm can serve its demand, and
thus, may contain information regarding future write-downs and other inventory-related costs
that affect a firm’s earnings and ability to realize sales growth (cp. §2.1). If investors do not
fully incorporate this operational information into the pricing of stocks in a timely manner,
then the anomalous stock returns can be explained by the market’s failure to consider the full
information content of DSM, and the anomaly will dissipate over time into the market. The
second explanation of the market anomaly is that DSM is a proxy for an unknown risk and
that the market demands a risk premium from retailers with low DSM (labeled the “market
efficiency story”).
Therefore, to shed some light on the underlying causes of the negative relationship be-
tween DSM and abnormal stock returns, we supplement the previous analyses along three
dimensions: first, we use first-order autoregressive models for changes in one-year-ahead earn-

ings and one-year-ahead sales (growth) to test the relationship between our base measure,
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DSM IT SAL , and these variables. Table 9 summarizes the regression results that we obtain
from using a generalized least squares estimation method, which accounts for panel-specific
AR(1) autocorrelation and a heteroskedastic error structure. We include year- and two-digit
SIC code-based segment dummies in all of the models to control for macroeconomic factors
and segment specifics that may affect retailers’ earnings per share (EPS), sales, and inventory
management practices.
In Model 1a, we regress the change in earnings per share of firm i in fiscal year t, ∆EP Sit ,
measured as the change in EPS deflated by the previous fiscal year’s ending stock price, on
∆EP Si,t−1 and the previous year’s accruals, ACCi,t−1 . We do so because Sloan (1996)
and Thomas and Zhang (2002) show that the inventory component of accruals predicts
future earnings. Consistent with the accounting literature, we find that accruals predict
IT SAL
future earnings. In Model 1b, we add DSMi,t−1 as an additional predictor. The negative
IT SAL
coefficient of DSMi,t−1 in Model 1b confirms the negative relationship between DSM and
future earnings, which is in line with the results of the above portfolio analysis and the Fama-
MacBeth regressions. In Model 1c, we include AITi,t−1 , and AIGi,t−1 as additional controls.
Consistent with Alan et al. (2014) and Kesavan and Mani (2013), our regression results reveal
a positive relationship between adjusted inventory turnover and one-year-ahead earnings,
as well as a negative relationship between abnormal inventory growth and one-year-ahead
IT SAL
earnings, while the negative and significant effect of DSMi,t−1 persists across all models.
In Model 2a, we regress the change in sales of firm i in year t, ∆SALit , measured as
the change in sales from the previous to the recent fiscal year, deflated by the previous
fiscal year’s sales (i.e., sales growth), on ∆SALi,t−1 , the average consumer price index of

Table 9: Relationship between DSM and one-year-ahead earnings and one-year-ahead sales
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∆EP Sit ∆SALit
Indep. Variables Model 1a Model 1b Model 1c Model 2a Model 2b Model 2c
Constant 0.039*** 0.042*** -0.045*** 1.060*** 1.294*** 0.313***

∆EP Si,t−1 0.186*** 0.177*** 0.131***
∆SALi,t−1 0.095*** 0.109*** 0.453***
ACCi,t−1 -0.117*** -0.119*** -0.120***
CP Ii,t−1 -0.010*** -0.012*** -0.002***
GMi,t−1 0.021* 0.069*** 0.017**
IT SAL
DSMi,t−1 -0.005*** -0.006*** - 0.024*** -0.011***
AITi,t−1 0.008** 0.009**
AIGi,t−1 -0.019*** 0.082***
Year dummies Yes Yes Yes Yes Yes Yes

Segment dummies Yes Yes Yes Yes Yes Yes
Wald χ2 3,803.63 11,658.39 17,864.80 1,252.01 1,767.15 21,444.89
No. of Observations 2,684 2,635 1,985 3,075 2,974 2,027
*p < .1, **p < .05, ***p < .01. To mitigate the influence of outliers, we have winsorized all of the continuous
variables (except CPI) at the .02-level.
the previous year, CP It−1 , data that we obtained from the U.S. Bureau of Labor Statistics
website, and the previous fiscal year’s gross margin as calculated by Kesavan and Mani
(2013), i.e., GMi,t−1 ≡ SALi,t−1 / (COGSi,t−1 − LIF Oi,t−1 + LIF Oi,t−2 ). In Model 2b, we
IT SAL IT SAL
include DSMi,t−1 as an additional predictor. The negative coefficient of DSMi,t−1 reveals
that DSMs indicate a reduction in future sales (growth). The negative relationship between
DSM and future sales follows our discussion in §2.1 because DSMs are indicative of either
insufficient inventory or because products from prior periods become obsolete and do not meet
current customer requirements, leading to lower customer service and retention, all of which
affect sales growth. In Model 2c, we include AITi,t−1 and AIGi,t−1 as additional controls in
IT SAL
the model, but the negative and statistically significant effect of DSMi,t−1 persists. For all

models, we compute Wald tests to assure that the addition of variables improves the model fit
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(p < .01). The results of Models 1 and 2 provide initial evidence supporting the “information
story” because the information content of DSM seems to predict near-term earnings and sales
growth.
Second, to explore whether the relationship between DSM and future stock returns can
be explained by an “information story” or a “market efficiency story,” we shift the portfolio
formation date from July 31 of year t to June 30 of year t. This change implies that we use
accounting information from the fiscal period from January 1 of year t − 1 until December
31 of year t − 1, rather than using accounting information from February 1 of year t − 1
until January 31 of year t to construct the portfolios. This one-month shift in the portfolio
formation date causes a significant information disadvantage because the majority of retailers
in our sample (46.49%) have their fiscal-year-end in January. Accordingly, the information
used to rank firms according to their DSM value and to construct portfolios on June 30 of year
t is 17 months old for these 46.49% of retailers, rather than 6 months old when constructing
portfolios on July 31 of year t.
The time shift severely affects the performance of all portfolios formed on one of the
proposed DSM measures and the performance of zero-cost portfolios declines, on average, by
18.29% compared to the original formation process. These results provide additional evidence
for an “information story” because the information content of DSM seems to dissipate over
time into the market. We provide the detailed results of the Fama and French (1993) plus
momentum (Carhart 1997) regressions for the quintile and zero-cost portfolios formed on
DSM IT SAL , DSM IDSAL , and DSM P U RSAL in Appendix C.
Third, to gain further insights regarding potential explanations of the relationship between

DSM and future stock returns, we track portfolio returns for five years. In particular, we
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construct portfolios on July 31 of year t using accounting information for the fiscal period
from February 1 of year t − 1 until January 31 of year t. However, rather than liquidating
the portfolios on July 31 of year t + 1, we hold them for four additional years (until July 31
of year t + 5). We compute monthly average excess returns of the portfolios over each year
of the holding period and report in Table 10 the abnormal stock returns that we obtain from
the Fama and French (1993) three-factor plus momentum (Carhart 1997) model. In line with
the above findings, we observe that the portfolio performance decreases substantially over
time and that zero-cost portfolios based on DSM IT SAL and DSM IDSAL do not generate
abnormal returns beyond year t + 3. The zero-cost portfolios based on DSM P U RSAL do
not even generate abnormal returns from year t + 2 onwards. We suspect that the earlier
dissipation of information contained in DSM P U RSAL into the market occurs because the
information content of DSM P U RSAL is per definition older than the information content of
DSM IT SAL and DSM IDSAL .
The decrease in the performance of zero-cost portfolios could also occur because a large
number of firms that are assigned to a particular portfolio rank in period t transits to other
portfolio ranks in subsequent years. Therefore, if the fraction of firms that transit from
low to high portfolio ranks in subsequent years is very high (and/or vice versa), and if
this fraction increases severely over time, then the assessment of the longitudinal portfolio
performance would not provide any evidence of an “information story.” To evaluate this
alternative explanation for the decrease in the performance of zero-cost portfolios, Table 11
presents the percentage of firms that transit from low portfolio ranks (1 or 2) in period t to

Table 10: Longitudinal portfolio performance benchmarked against Fama-French-Carhart
factors
Accepted Article
t+1 t+2 t+3 t+4 t+5
Portfolio α α α α α
rank
DSM IT SAL
1 (low) 1.21%*** 0.47%*** 0.22% 0.04% -0.28%*
2 0.71%*** 0.41%*** 0.45% 0.06% 0.07%
3 -0.01% -0.08% -0.14% 0.02% 0.16%
4 -0.04% 0.03% 0.11% 0.00% 0.57%**
5 (high) -0.40%*** -0.15% 0.09% 0.24% 0.01%
Zero-cost 1.13%*** 0.48%*** 0.16%** -0.15% -0.08%
DSM IDSAL
1 (low) 1.16%*** 0.49%*** 0.36% 0.14% -0.16%
2 0.46%*** 0.49%*** 0.69%*** 0.23% 0.06%
3 0.36%*** 0.19%* 0.09% -0.34%** 0.00%
4 -0.04% 0.14% 0.32% 0.27%* 0.51%**
5 (high) -0.38%*** -0.30% 0.22% 0.28%* 0.04%
Zero-cost 1.04%*** 0.44%*** 0.17%*** -0.30% -0.08%
DSM P U RSAL
1 (low) 0.44%*** 0.21%* -0.09% -0.11% -0.31%*
2 0.33%*** 0.39%*** 0.23% 0.34%*** -0.08%
3 0.19%** 0.12% 0.14% 0.16% 0.10%
4 -0.03% 0.40%*** 0.82%*** 0.08%* 0.20%
5 (high) -0.59%*** -0.07% -0.34% 0.11% 0.12%
Zero-cost 0.73%*** 0.17%*** 0.00 -0.24% -0.63%
*p < .1, **p < .05, ***p < .01.
high portfolio ranks (4 or 5) in subsequent years.5 For example, 24.42% of the firms that
were assigned to portfolio ranks 1 or 2 in period t – based on DSM IDSAL – would have
been assigned to portfolio ranks 4 or 5 if the portfolios were rebalanced in t+3. Because
only a minority of firms transits from low to high portfolio ranks, and because this fraction
remains rather stable over time, we feel confident in the above-proposed interpretation: the
5
The transition rates from portfolio ranks 4 or 5 in period t to portfolio ranks 1 or 2 in subsequent years
are even lower than those presented in Table 11.

observed decrease in portfolio returns over time results from to the ongoing dissipation of the
Accepted Article
information that DSM contains into the market.
Table 11: Percentage of firms switching from portfolio ranks 1 or 2 in year t to portfolio
ranks 4 or 5 in subsequent years
t+1 t+2 t+3 t+4 t+5

DSM IT SAL 23.05% 27.47% 26.83% 27.78% 29.00%
DSM IDSAL 21.47% 26.37% 24.42% 26.85% 27.07%
DSM P U RSAL 18.00% 19.65% 22.33% 21.72% 23.19%
In sum, the results of the above three analyses suggest that the market anomaly can
be explained by the “information story.” That is, investors do not immediately incorporate
the informational content of DSM when pricing of stocks. However, over time, the anomaly
dissipates into the market, most likely because investors consider variables such as EPS and
sales growth when pricing stocks, which we show to be affected by DSM of prior periods.
5 Conclusion
Grounded in OM theory, this study develops a novel KPI for demand-supply mismatches, the
DSM, which relates the volatility of inventory productivity to the volatility of demand. A
firm that experiences greater volatility in terms of inventory productivity relative to demand
volatility suffers from a greater mismatch of demand and supply. The DSM contains valu-
able and distinct information regarding firm operations because high volatility in inventory
productivity may imply that a firm faces periods with excessively high inventories and other
periods with stockouts, although the average inventory productivity may imply that a firm’s
operations are well managed. We normalize the CV of inventory productivity by the CV

of demand to incorporate the fact that firms with (naturally) higher demand volatility hold
Accepted Article
higher inventory levels (safety stocks).
Investigating a sample of 424 publicly listed U.S. retailers, we apply portfolio-asset pricing
models and demonstrate that zero-cost portfolios formed on DSMs generate abnormal stock
returns of up to 1.13% that cannot be explained by the Fama and French (1993) three-
factor plus momentum (Carhart 1997) risk factors. These strong market anomalies related
to DSM are observed over the entire period of 1985-2013 and persist after controlling for
both alternative inventory productivity measures and firm-characteristics that are known to
predict stock returns. We reveal further that DSM is indicative of lower future earnings and
lower sales growth and provide evidence that the identified market inefficiency results from
investors’ failure to incorporate all of the information that DSM contains into the pricing of
stocks. As such, our results are relevant to the audience of (i) investors/stock analysts, (ii)
managers, and (iii) researchers.
We encourage investors and stock analysts to leverage quarterly financial information in
addition to annual financial reports to gain a more comprehensive understanding of opera-
tional processes. Based on our measure of DSM, which is computed on the basis of quarterly
data, we identify a market inefficiency. Analysts can leverage this knowledge; moreover, we
encourage future research to delve deeper into the underlying mechanisms that lead to the
presented effects.
Operations managers may also benefit from our results. In line with prior research (e.g.,
Chen et al. 2005, 2007, Hendricks and Singhal 2009, Kesavan and Mani 2013), we reveal
a strong correlation between inventory management and stock market performance, thus
providing empirical support for budget negotiations. CEOs may place greater emphasis on

improvement projects with an OM focus, as our results clearly imply a relationship be-
Accepted Article
tween DSMs and stock market performance. In addition, the KPI of DSM may be employed
for benchmarking a firm’s inventory management performance against industry peers while
avoiding average measures of inventory productivity, which can smooth out important infor-
mation. Furthermore, prior research quantified the negative financial implications of supply
chain disruptions (i.e., the result of severe DSMs) after these are announced in major business
press (e.g., Hendricks and Singhal 2005). Because our measures of DSM capture mismatches
on a longitudinal scale that must not have been subject to media attention, the DSM mea-
sure may be employed as an indicator of future disruptions. Throughout the paper, we stress
the importance of appropriate performance metrics. Therefore, it may be advantageous to
also reflect the interdependence between functions through KPIs: for example, CEOs may
consider weighting their marketing budgets using OM-related metrics, such as DSM, rather
than allocating fixed percentages of sales, as is done in most firms (e.g., Fischer et al. 2011).
Our results also have implications for research, and they complement the OM and SCM
literature that links business practices to financial data. Future research may employ the
DSM measure in a broad spectrum of analyses. Whereas in the context of the bullwhip effect,
relative volatility measures are quite commonly employed, we hope to encourage scholars to
consider such relative volatility measures to a greater extent at the firm-level. Furthermore,
as it is beyond the scope of this study to identify the multitude of potential causes for DSMs,
future research may benefit from a careful analysis of the various factors and events that
drive DSMs.
Our paper has one major limitation: we restrict our analysis to firms in the retailing
sector because inventory investments account for large fractions of these retailers’ current

assets and are thus a key management item. Although industry-specific analyses have several
Accepted Article
advantages, they naturally limit the generalizability of findings. Therefore, it might be
interesting for future research to analyze whether our findings also apply to other sectors.
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Appendix A: The Effect of Ordering Frequency on DSM
Accepted Article
Consider a responsive retailer (A) that places twice as many orders per quarter as a less
responsive retailer (B), ceteris paribus. Suppose A and B face identical quarterly COGS
of ψ in quarter q = 1 of a year t. Given that B has an inventory level in q of Iq=1 , A’s

Iq=1
quarterly inventory is only half of B’s, i.e., 2
. Accordingly, B’s inventory turnover in q = 1
B 2ψ A ψ
is ITq=1 = Iq=1
, and A’s inventory turnover is ITq=1 = Iq=1
. Assume further that over the
next three quarters, the inventory turnover of A and B increases by 20% per quarter, such
B B
B

that ITq=2 = 1.2 ITq=1 , ITq=3 = (1.2)2 ITq=1
B B
, ITq=4 = (1.2)3 ITq=1
B
, and for ITqA for q =
i
ITq=1
¯i =
1, ..., 4 analogously. The average inventory turnover is then IT
P3 k
t 4 k=0 (1.2) for i =
A, B, and the standard deviation of the inventory turnover over the four quarters for retailer
s s
4 2 4 2
i = A, B is 14
P ¯ i = IT i
ITqi − IT 1
P
(1.2)q−1 − 14 3k=0 (1.2)k . Therefore, the
P
t q=1 4
q=1 q=1
CV of the inventory turnover of i over the four quarters is
s
4 P3 2
1 1
P
4
(1.2)q−1 − 4 k=0 (1.2)
k
q=1
CV (IT )it = i
ITq=1 P3 k
4 k=0 (1.2)
which is identical for both retailers. Table 12 presents an intuitive example that shows that
the CV of IT of retailer A is equal to that of retailer B, although retailer A has a higher
ordering frequency (i.e., is more responsive).

Table 12: Responsiveness and the CV of IT
Accepted Article
Firm B Firm A
Period IT B SD(IT B ) M ean(IT B ) CV (IT B ) IT A SD(IT A ) M ean(IT A ) CV (IT A )
q=1 2.00 0.54 2.68 0.20 4.00 1.08 5.37 0.20
q=2 2.40 0.54 2.68 0.20 4.80 1.08 5.37 0.20
q=3 2.88 0.54 2.68 0.20 5.76 1.08 5.37 0.20
q=4 3.46 0.54 2.68 0.20 6.91 1.08 5.37 0.20
SD=standard deviation.
Appendix B: Computation of AIG and AIT
We compute abnormal inventory growth (AIG) as proposed by Kesavan and Mani (2013).
The authors derive the measure from the expectation model of growth of inventory per
store (Kesavan et al. 2010), which incorporates the dependence between inventory per store
and the previous fiscal year’s inventory per store, contemporaneous and lagged COGS per
store, gross margin, lagged accounts payable to inventory ratio, store growth and lagged
capital investment per store, all of which are suggested to affect inventory investments.
For firm i in fiscal year t and quarter q, Kesavan and Mani (2013) define the average
h P i
AIG 1 4
annual inventory per store as isit ≡ ln 4 q=1 IN Vitq + LIF Oit /Nit , with Nit de-
noting firm i’s total number of stores open by the end of fiscal year t, cost of goods sold
per store as csAIG

it ≡ ln ([COGSit − LIF Oit + LIF Oi,t−1 ] /Nit ) , gross margin as gmAIG
it ≡
ln (SALit / [COGSit − LIF Oit + LIF Oi,t−1 ]), accounts payable (AP ) to inventory ratio as
P4
AIG q=1 APitq AIG Nit
piit ≡ ln P 4 , store growth as git ≡ ln Ni,t−1 , and the capital in-
q=1 IN Vitq +4LIF Oit
h P P5 REN Titτ i
1 4
vestment per store as capsAIG it ≡ ln 4 q=1 P P E itq + τ =1 (1+d)τ /Nit , with P P E
denoting the plant, property, and equipment, REN Tit1 , REN Tit2 , ... REN Tit5 , denoting
retailers’ rental commitments for the next five years, and d denoting the discount rate, which
is assumed to be d = 8%.

Then, the expectation model of growth of inventory per store is estimated in first dif-
Accepted Article
ferences (∆) and given by the following log-log specification: ∆isAIG
it = ∆x0it β2 + ∆ηit .
The column vector, x0it , comprises the explanatory variables csAIG AIG AIG AIG
it , gmit , csi,t−1 , isi,t−1 ,
piAIG AIG
i,t−1 , git , and capsAIG
i,t−1 , and β2 is the row vector of the corresponding coefficients, with
β2 = (β21 , β22 , β23 , β24 , β25 , β26 , β27 )0 . Kesavan and Mani (2013) assume that firms in a given
segment (i.e., two-digit SIC codes) are homogeneous, which implies that the coefficients of β2
are identical for firms in a given segment, and hence reduces the above estimation equation
to ∆isAIG
it = ∆x0it β2,s(i) + ∆ηit , where s(i) denotes the two-digit SIC code segment specific
coefficients to which firm i belongs. Based on the coefficients that the authors obtain using
a generalized least squares method, which handles heteroskedasticity and panel-specific au-
tocorrelation, Kesavan and Mani (2013) predict the expected logged inventory growth per
store, E(∆isAIG
it ). The abnormal inventory growth per store for firm i in fiscal year t is then
AIG
ISit
computed as AIGit = IS AIG − 1 − (exp(E[∆isAIG AIG
it ]) − 1), with ISit = exp(isAIG
it ).
i,t−1
We obtain the estimates of abnormal inventory growth analogously to the above-described
procedure, with the slight adaptation that we do not deflate inventory, COGS, and capital
investment by the number of stores and that we do not include store growth as additional
control variable in the regression equation. We follow this approach because information
regarding the number of stores per retailer is not available for many firms during our sampling
period and would thus significantly decrease the sample size, potentially rendering the sample
unrepresentative. That is why Alan et al. (2014) make a similar adjustment.
In line with Alan et al. (2014), we compute adjusted inventory turnover (AIT ) by fit-
ting cross-sectional regression models for each firm i and year t, controlling for segment-
specific fixed effects (two-digit SIC code), gross margins, capital intensity, and sales sur-

prise. Controlling for gross margin (GM ) is important because GM is positively correlated
Accepted Article
with a firm’s service level, product variety, and the quality of products, each of which may
lead to lower inventory turnover. Capital intensity (CI) serves as proxy for firms’ supply
chain and information technology infrastructure, which may facilitate the reduction of safety
stocks. Therefore, inventory turnover should be adjusted for CI. Moreover, sales surprise
(SS) may affect inventory turnover because high sales realizations (compared to the pre-
vious year) may cause an increase in inventory turnover and serves further as proxy for
economic shocks. To compute AIT , we operationalize these variables as follows: for firm
COGSit −LIF Oit +LIF Oi,t−1
i and fiscal year t, inventory turnover is defined as ITitAIT ≡ IN Vit +LIF Oit
, GM
P4 REN T REN Tit5
GF Ait + τ =1 (1+d)itτ
τ + d(1+d)4
SALit
as GMitAIT ≡ COGSit −LIF Oit +LIF Oi,t−1
, CI as CIitAIT ≡ P4 REN T REN Tit5 , with
T Ait +LIF Oit + τ =1 (1+d)itτ
τ + 4
d(1+d)
GF A denoting gross fixed assets, and the discount rate d is again assumed to be d = 8%,
SALit
and SS as SSitAIT ≡ SALi,t−1
. Given these variables, we fit the following regression model for
each firm i and year t: ln(ITitAIT ) = Fj[i] + b1 ln(GMitAIT ) + b2 ln(CIitAIT ) + b3 ln(SSitAIT ) + it ,
with Fj[i] being the segment-specific intercept j to which firm i belongs. AIT for firm i in
fiscal year t is then given by the residual (it ) of that regression equation.

Appendix C: Estimation Results after Shifting of the
Accepted Article
Portfolio Formation Date
Table 13 summarizes the estimation results for the zero-cost and quintile portfolios from the
Fama and French (1993) three-factor plus momentum (Carhart 1997) model for DSM IT SAL ,
DSM IDSAL , and DSM P U RSAL , after the shifting of the portfolio formation date from July
31 of year t to June 30 of year t.
Table 13: Fama-French-Carhart four factor regression results for zero-cost and quintile port-
folios using December 31 of t-1 as cutoff date for portfolio formation
Portfolio α RmRf SM B HM L UMD R2

rank
DSM IT SAL
1 (low) 0.82%*** 0.97*** 0.61*** 0.17*** -0.21*** 60.76%
2 0.74%*** 1.20*** 0.56*** 0.37*** -0.25*** 62.45%
3 0.12%** 0.99*** 0.64*** 0.37*** -0.44*** 59.61%
4 -0.11% 1.13*** 0.75*** 0.46*** -0.33*** 63.16%
5 (high) -0.35%*** 1.01*** 1.02*** 0.39*** -0.44*** 59.87%
Zero-cost 0.97%*** 0.01*** -0.29*** -0.16*** 0.15*** 68.51%
DSM IDSAL
1 (low) 0.84%*** 1.04*** 0.62*** 0.26*** -0.22*** 61.11%
2 0.56%*** 1.07*** 0.52*** 0.29*** -0.31*** 60.15%
3 0.35%*** 1.07*** 0.65*** 0.35*** -0.34*** 62.59%
4 -0.27%*** 1.08*** 0.68*** 0.41*** -0.34*** 61.79%
5 (high) -0.21%** 1.05*** 1.10*** 0.42*** -0.44*** 61.22%
Zero-cost 0.93%*** 0.05*** -0.31*** -0.14*** 0.12*** 67.65%
DSM P U RSAL
1 (low) 0.35%*** 1.03*** 0.53*** 0.28*** -0.25*** 58.87%
2 0.33%*** 1.04*** 0.57*** 0.21*** -0.34*** 65.85%
3 0.12% 1.10*** 0.68*** 0.38*** -0.34*** 65.92%
4 0.04% 1.03*** 0.72*** 0.42*** -0.34*** 65.61%
5 (high) -0.35%*** 0.96*** 0.84*** 0.31*** -0.16*** 64.88%
Zero-cost 0.51%*** 0.04*** -0.22*** -0.12*** -0.09*** 69.96%
*p < .1, **p < .05, ***p < .01.

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Authors: Kristoph K. R. Ullrich, Sandra Transchel

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to changes in demand or supply without stockpiling unnecessary inventory needs to be com-

et al. 2007). Despite increasing awareness of the importance of inventory management in

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superior inventory management.

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by providing evidence for an inverted U-shaped relationship between abnormal inventory

information into investment decisions.

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In addition to OM scholars, accounting researchers also explore the predictive power

of inventory-related information. Bernard and Noel (1991) demonstrate that unexpected

changes in the raw materials and work-in-process inventories of manufacturing companies

and Zhang 2002).

ability to manage inventory effectively (i.e., minimizing demand-supply mismatches) predicts

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of inventory productivity smooth out important information.

Similar to prior research demonstrating that inventory productivity is indicative of future

zero-cost portfolios formed on this inventory-productivity-to-demand-volatility ratio generate

abnormal returns of up to 1.13%. We consider different measures of inventory productiv-

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approximate DSM further as the volatility of purchases/orders relative to the volatility of

relationship between demand-supply mismatches and stock market performance.

study, and propose directions for future research.

2.1 Relative Inventory Productivity Volatility Measure (DSM)

year t = 1, . . . , 29 and quarter q = 1, . . . , 4) and company-specific (i = 1, . . . , 424) effects.

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follows. We define inventory turnover as

and, analogously, inventory days over a quarter of 90 days as

Alan et al. 2014) or normalizes inventory productivity by an industry peer’s performance to

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which inventory needs to be managed efficiently.

Specifically, we operationalize DSM as the CV of inventory productivity relative to the

CV of demand on the basis of four quarterly observations, i.e.,

demand is approximated by sales.2 For notational convenience, we define DSM IT SAL ≡

to the CV of sales, DSM IT SAL of firm i in year t is computed as follows:

The computation of DSM IDSAL follows accordingly.

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inventory volatility and financial performance in manufacturing industries. The authors

capability to respond “smoothly” to all sources of sales fluctuations in terms of inventory,

in making adjustments to inventory in response to changes in demand patterns.

Table 1: Example of DSM

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relative to sales volatility is indicative of superior information-sharing practices, superior

practices (Mishra et al. 2013). Therefore, a high degree of demand-and-supply mismatches

costs to rise and revenues to decrease.

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is predictive of future stock returns.

which may affect its predictive power.

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our DSM measure can be leveraged to predict future stock returns.

2.2 Data Description

size for the application of econometric methods.

Poor’s COMPUSTAT -North

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& Poor’s COMPUSTAT -North

jewelry stores, SIC 5944).

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of the main variables that will be used throughout the paper.

2.3 Portfolio Formation

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ERpm = αp + β1p RM RFm + β2p SM Bm + β3p HM Lm + β4p U M Dm + pm , (4)

Constant 0.039* 0.042* -0.045* 1.060* 1.294* 0.313*