TY - JOUR

T1 - The inverse hockey stick effect

T2 - an empirical investigation of the fiscal calendar’s impact on firm inventories

AU - Hoberg, Kai

AU - Badorf, Florian

AU - Lapp, Lars

PY - 2017/8/18

Y1 - 2017/8/18

N2 - We empirically investigate how manufacturers’ inventory decisions relate to the fiscal calendar. Although optimal firm inventories should depend on demand and supply, we find that the artificial accounting construct of the fiscal year frequently drives inventory dynamics. In an effort to manage earnings and cash flows (CFs) towards the fiscal year-end (FYE), firms significantly reduce their inventories in the fourth fiscal quarter only to increase their inventories in the next fiscal year. Using a sample of 4877 US manufacturing firms for the period 1990–2010, we find that inventories are 3.9–6.0% lower on average in the fourth fiscal quarter. In the analysis, we control for inventory theory-related factors that have been identified in prior literature. Because this pattern is the inverse of that observed for sales, we refer to this phenomenon as the inverse hockey stick effect. The effect holds for all three individual inventory types: raw materials, work in progress and finished goods. We find that inventory reductions in the fourth fiscal quarter are particularly substantial if firms have an incentive to beat CF targets. In contrast to our expectations, we do not find evidence that financial distress links to inventory reductions at the FYE.

AB - We empirically investigate how manufacturers’ inventory decisions relate to the fiscal calendar. Although optimal firm inventories should depend on demand and supply, we find that the artificial accounting construct of the fiscal year frequently drives inventory dynamics. In an effort to manage earnings and cash flows (CFs) towards the fiscal year-end (FYE), firms significantly reduce their inventories in the fourth fiscal quarter only to increase their inventories in the next fiscal year. Using a sample of 4877 US manufacturing firms for the period 1990–2010, we find that inventories are 3.9–6.0% lower on average in the fourth fiscal quarter. In the analysis, we control for inventory theory-related factors that have been identified in prior literature. Because this pattern is the inverse of that observed for sales, we refer to this phenomenon as the inverse hockey stick effect. The effect holds for all three individual inventory types: raw materials, work in progress and finished goods. We find that inventory reductions in the fourth fiscal quarter are particularly substantial if firms have an incentive to beat CF targets. In contrast to our expectations, we do not find evidence that financial distress links to inventory reductions at the FYE.

KW - empirical data

KW - fiscal calendar

KW - hockey stick phenomenon

KW - incentives

KW - inventory management

KW - Economics

UR - http://www.scopus.com/inward/record.url?scp=85007390294&partnerID=8YFLogxK

U2 - 10.1080/00207543.2016.1269969

DO - 10.1080/00207543.2016.1269969

M3 - Journal articles

AN - SCOPUS:85007390294

VL - 55

SP - 4601

EP - 4624

JO - International Journal of Production Research

JF - International Journal of Production Research

SN - 0020-7543

IS - 16

ER -