Excess Inventory and Long-Term Stock Price Performance

This paper estimates the long-run stock price effects of excess inventory using nearly 900 excess inventory announcements made by publicly traded firms during 1990-2002. It examines the stock price effects starting one year before through two years after the excess inventory announcement date. Statistically significant abnormal returns are observed during the year before the announcement and on announcement. There is no evidence of statistically significant abnormal return during the two years after the announcement. I estimate that the mean (median) abnormal return due to excess inventory during the year before the announcement and on announcement is -37.22% (-27.03%). Negative abnormal returns are observed across industries, calendar time, firm size, and actions taken to deal with excess inventory. The evidence suggests that the stock market partially anticipates excess inventory situations, firms do not recover quickly from the negative effect of excess inventory, and the negative effect of excess inventory is economically and statistically significant.