Change in Inventory and Firm Valuation

Authors: Bao B-H.¹; Bao D-H.²

Source: Review of Quantitative Finance and Accounting, Volume 22, Number 1, 200401 , pp. 53-71(19)

Publisher: Springer

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Abstract:

This study examines the effect of the informativeness of change in inventory on firm valuation. A firm's change in inventory is informative if its percentage change in cost of goods sold is positively and significantly associated with its lag one percentage of production added to inventory (a measure of change in inventory). Sample firms are divided into two groups: firms with informative change in inventory, and other firms. Analyses then are performed to examine the association between stock price and earnings. Results consistently show that the association is higher for firms with informative change in inventory. Thus, knowledge on the informativeness of change in inventory is useful for firm valuation.

Keywords: firm valuation; change in inventory; earnings; stock prices

Document Type: Research article

Affiliations: 1: Department of Accountancy, Hong Kong Polytechnic University 2: Accounting and Finance Department, College of Business, Rowan University Tel.: (856) 256-4500, ext. 3031., Email: bao@rowan.edu

Publication date: 2004-01-01