Richard Kum-Yew Lai
DBA in Technology and Operations Management
Dissertation Chair: Prof. A. Raman
Empirical Operations Management - Three Essays
This dissertation comprises three papers on how firms really manage operations. In particular, I focus on the management of inventory. I also focus on how operations management affects and is affected by managers' financial incentives.
In the first paper, I first observe a fiscal‐year end (FYE) effect in which firm‐level inventory exhibits large and regular dips at the end of the firm's fiscal year. A classical story is that firm inventory is tied to the calendar year, which reflects fundamental industry demand. So it is peculiar that inventory is also tied to the fiscal year, which is an accounting artifact. In the paper, I show empirically that the FYE effect is due to sales timing, in which managers' private benefits lead them to pull some post‐FYE sales into the FYE. To test for sales timing, I employ a novel natural experiment based on Germany's tax code change in 2000, when some firms change their FYEs in a way that is plausibly exogenous to inventory patterns. I report evidence consistent with sales timing that is not explained by alternative hypotheses. I conclude by posing intriguing implications arising from the existence of the FYE effect and the finding that sales timing is a cause.
In the second paper called Inventory Signals, I consider how operational competence-such as inventory management competence-translates to market value, when firms cannot credibly communicate their competence to the stock market. When the stock market sees a high‐inventory firm, it cannot tell whether the inventory is due to incompetence or to a strategy to enhance fill rate. Based on this incomplete information, she has to decide how to value the firm. Based on the investor's decision algorithm, high‐competence firms that might otherwise pursue a high‐inventory high‐fill‐rate strategy face the decision of whether to carry less inventory, so as to signal competence to the investor. What holds in equilibrium? I show conditions for separating and pooling perfect Bayesian equilibria. I also provide empirical evidence consistent with three predictions of this theory that inventory has a signaling role. The theory has implications for firms, such as how to strategically communicate to the market, reward managers, or even whether to go public and be subject to market pressures.
While the first paper considers inventory management within firm and year, the second studies that across firms and between years. The second paper also considers managerial benefits arising not from sales incentives, but from short‐term considerations of their firms' stock prices.
These first two papers consider a world into which actors-firms and the stock market-are rational. The third paper, called Inventory and the Stock Market, is motivated by the growing body of evidence that the stock market can temporarily mis‐value firms. I report evidence that the market's "behavioral" component explains firms' inventory as much as its "rational" component. I further test three possibilities for how the behavioral component works. The first is a financing channel. When the market over‐values firms, firms can get cheaper financing and increase inventory. The second is dissipation. When the market over‐ or undervalues firms, firms are less disciplined and let inventories rise. The third is catering. When the market discounts high‐inventory firms, firms decrease inventory, and vice versa. I report evidence that weakly supports financing, rejects dissipation and strongly supports catering. The findings suggest that we need to find new ways of calculating the cost of capital for operations models. They could begin to form the basis of a more empirically accurate account of how inventory decisions are affected by financial markets.
