Detecting overproduction: Evidence from inventory write-down |
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Authors: | Fernando Comiran Subprasiri Siriviriyakul |
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Institution: | 1. School of Management, University of San Francisco, San Francisco, California, USA;2. School of Business, University of Connecticut, Stamford, Connecticut, USA |
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Abstract: | We use inventory write-downs to differentiate opportunistic and non-opportunistic overproduction measures. We posit that non-opportunistic overproduction is positively associated with future write-downs because overproduction generally leads to excess inventory, while opportunistic overproduction (to inflate earnings) is negatively associated with write-downs because write-downs decrease earnings. We find that change-based proxies (deviations from past behaviour) are positively associated with the likelihood of future write-downs, whereas residual-based proxies (deviations from industry norms) are negatively associated with this likelihood, suggesting that the former (latter) primarily capture non-opportunistic (opportunistic) overproduction. Our study highlights the importance of using appropriate overproduction measures for each research setting. |
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Keywords: | inventory write-down overproduction real activity manipulation |
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