The Asset Pricing Implications of Seasonal Inventory Building

Professor Kevin Aretz and his collaborators propose a new way of understanding how a business manages seasonal output price fluctuations by storing its products in inventory and what the stock return implications of those inventory policies are.

According to their theory, the firm maximizes profits by building up output inventory before the season when prices are expected to be highest, paying production costs upfront and reducing its inventory-induced leverage in the process. This reduction in leverage leads to lower expected returns during the high-price season. However, if the cost of holding inventory is high, the firm does not engage in this type of inventory building, and the pattern in returns disappears.

Their analysis supports this theory: companies with seasonal sales tend to increase their inventory before high-sales periods. Additionally, the inventory-induced leverage is positively related to stock returns and helps explain various stock market patterns, including those linked to seasonal sales, same-month returns, stock momentum, and quarterly return on equity.

Seasonal Inventory Leverage, the paper presented was written in collaboration with Kevin Aretz, University of Manchester; Hening Liu, University of Manchester; Kevin Scheider, University of Cambridge.

Professor Kevin Aretz

Kevin Aretz is a Professor of Finance at Alliance Manchester Business School with interests in the research areas of theoretical and empirical cross-sectional asset pricing, empirical corporate finance, and econometrics.

In his recent work, he uses real options asset pricing models to explain stock return anomalies, in addition to employing shock-based inference methods to study corporate finance phenomena, such as access to debt. He has also started studying the cross-section of returns of non-equity asset classes, such as single-stock options or corporate bonds.

Professor Aretz has presented his research at all major conferences, including the American Finance Association (AFA), European Finance Association (EFA), SFS Cavalcade, Financial Intermediation Research Society (FIRS), and Western Finance Association (WFA).

He has also published in journals such as the Journal of Finance, Journal of Financial & Quantitative Analysis, Management Science, Review of Finance, Journal of Corporate Finance, Journal of Banking and Finance, and International Journal of Forecasting.

CAIR Thematic Talks Series

CAIR Thematic talks bring you exciting research tackling real-life issues that can be solved by accounting and finance. We bring you the information and encourage you to share a drink with our speaker at the end.

This talk series has been designed to encourage cross-disciplinary collaboration in an informal setting.