HOW DOES INVENTORY MANAGEMENT AFFECT ANALYST FORECAST ACCURACY?

Abstract

Purpose - This paper aims to examine the association between inventory level and analyst forecast accuracy. Firms can potentially manage earnings through inventory manipulation, and we hypothesize that it is therefore more difficult to forecast earnings in companies with large inventories.

Methodology - Analyst forecast accuracy is measured by forecast error, computed as the absolute value of the difference between forecasted earnings per share and actual earnings per share, normalized by the firm's stock price. Univariate tests and regression models are used to examine the relation between forecast error and inventory level. We further investigate whether analyst experience and the level of institutional ownership can reduce the forecast error.

Findings - The results show that forecast error is greater in firms with relatively higher levels of inventories and the size of the error decreases as analyst experience and the level of institutional ownership increase.

Conclusion - This study demonstrates that it is important for analysts to take extra care in forecasting earnings for companies with a history of high inventory levels.

Keywords

• Earnings management,inventories,forecast accuracy,institutional investors,analyst experience.

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