Demand-Supply Mismatches and Stock Market Reaction: Evidence from Excess Inventory Announcements

T paper documents that excess inventory announcements, an indication of demand-supply mismatch, are associated with an economically and statistically significant negative stock market reaction. The results are based on a sample of 276 excess inventory announcements made during 1990–2002. Over a two-day period (the day of the announcement and the day before the announcement) the mean (median) stock market reaction ranges from −6.79% to −6.93% (−4.51% to −4.79%), depending on the benchmark used to estimate the market reaction. The percent of sample firms that experience negative market reaction ranges from 73% to 74%. When excess inventory is at the announcing firm’s customers, the market reaction is more negative than when the excess inventory is at the announcing firm. The stock market reaction is less negative for excess inventory announcements made by larger firms but is more negative for firms with higher growth prospects and with higher debt-equity ratios.