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An International Meeting of American Accounting
Association
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The implications of absorption cost accounting and production decisions for firms’ future performance and valuation |
Mahendra Gupta
Washington University in Saint Louis
Mikhail Pevzner
Washington University in Saint Louis
Chandra Seethamraju
Washington University in Saint Louis
Abstract: In this paper, we evaluate a comprehensive set of inventory related signals, the association between those signals and future firm performance and how the stock market responds to these signals. We provide evidence that future accounting performance (ROA) of high relative fixed cost/high overproduction firms is significantly negatively associated with overproduction, while this relationship is positive for other firms. We find that the stock market reacts in a rational manner and that there is a substantial reduction in the positive valuation impact of overproduction for firms with high relative fixed costs and high overproduction.
We also examine the impact of order backlog, as also its interaction with overproduction and high relative fixed cost structure. We find that, in general, for firms that have “conflicting” order backlog signals, overproduction is significantly more negatively associated with future performance relative to firms that did not have a conflicting signal.