An empirical investigation into the inventory impact on financial performance of Chinese companies

This paper presents an empirical study to investigate how inventory affects the financial performance of publicly listed Chinese companies and how the stock market values firms with perfect supply chain management. By analyzing quarterly financial statement data of 1345 inventory-carrying listed Chinese companies from eight sectors during the period from Jan 2002 to Jun 2010, I find statistically significant associations not only between inventory and firms’ financial performance, but also between inventory and their stock price performance. First, a firm’s profitability, which reflects its financial performance and market valuation, which in turn reflects the stock price performance, are significantly associated with inventory dynamics, with the notion of inventory responsiveness. To be specific, inventory responsiveness is defined as the difference between percentage change in inventory and percentage change in sales over quarters, where positive(negative) inventory responsiveness indicates that inventory is growing(declining) relative to sales. Second, firms holding less inventory are associated with higher operating profitability and higher market valuation. This implies that firms with perfect supply-demand matching capacities and low inventory levels tend to exhibit superior financial performances and high market valuations. The results and conclusions remain unchanged with extensive robustness tests and alternative variable measures