Inventory Change and Stock Prices: An Empirical Investigation

Abstract

Nur Intan Kemalahati. Inventory Changes and Stock Prices: An Empirical Investigation. International Program. Accounting Department. Economics Faculty. UII. Yogyakarta 2006. 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 ofgoods sold is positively and significantly associated with its lag one percentage ofproduction added to inventory (a measure ofchange in inventory). Sample firms are divided into two groups: firms with informative change in inventory and other firms without informative change in inventory. Analyses then are performed to examine the association between stock price and earnings. Results consistently show that the association is lower for firms with informative change in inventory. Thus, knowledge on the informativeness of change in inventory is useful for firm valuation. Then, the implication is that investors and analysts do not have to rely more heavily on earnings figures when analyzing firms with informativeness ofchange in inventory.