Managing sales surprise: The role of operational slack and volume flexibility

Andrew S. Manikas and Pankaj C. Patel

International Journal of Production Economics, 2016, vol. 179, issue C, 101-116

Abstract: Investors use sales surprise or revenue surprise (the degree to which actual sales exceed expected sales) as an important component of firm valuation. Rapidly scaling operations in the short-run to meet higher than expected demand, however, could increase adjustment costs and lower efficiency, thereby lowering performance. Operational slack (excess capacity internally in the firm and longer cash-conversion cycles externally in the supply chain) and volume flexibility could help mitigate the negative effect of sales surprise on firm performance. Based on a sample of 1286 firms representing 38,473 firm-quarter observations from 2003 to 2013, and using fixed-effects regression, the proposed relationships, except for mitigating effects of internal operational slack (or, excess capacity measured as standardized industry-adjusted Sales to PPE ratio) are supported for short-term performance (ROA). Findings are robust to long-term firm performance outcomes (Tobin's Q and market-to-book ratio), to controlling for autoregressive effects of past sales surprise, alternate proxies for firm size, squared-term specification for slack, an alternate forecasting method for sales surprise, and controlling for inventory efficiency.

Keywords: Compustat; Volume flexibility; Operational slack; Unexpected positive demand (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:179:y:2016:i:c:p:101-116

DOI: 10.1016/j.ijpe.2016.05.019

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