Demand uncertainty, inventory, and cost structure
Building on Banker, Byzalov, and Plehn-Dujowich's (2014, The Accounting Review, 89(3), 839–865) congestion cost theory, we model firms' trade-off between a rigid cost structure and a high inventory level to reduce the congestion costs caused by uncertain demand. We demonstrate that firms w...
| Main Authors: | , , |
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| Other Authors: | |
| Format: | Journal Article |
| Language: | English |
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2024
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| Online Access: | https://hdl.handle.net/10356/178349 |
| _version_ | 1811695046032883712 |
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| author | Chang, Xin Kwok, Wing Chun Wong, George |
| author2 | Nanyang Business School |
| author_facet | Nanyang Business School Chang, Xin Kwok, Wing Chun Wong, George |
| author_sort | Chang, Xin |
| collection | NTU |
| description | Building on Banker, Byzalov, and Plehn-Dujowich's (2014, The Accounting Review, 89(3), 839–865) congestion cost theory, we model firms' trade-off between a rigid cost structure and a high inventory level to reduce the congestion costs caused by uncertain demand. We demonstrate that firms with a higher inventory level adopt a less rigid cost structure, but the effect of cost structure on inventory is theoretically ambiguous. Using a large sample of manufacturing firms in the United States, we empirically investigate the dynamic interdependence between cost structure and inventory choices. Our results reveal that cost structure rigidity and inventory are negatively associated with each other over time, suggesting that they serve as substitutes in tackling demand uncertainty. Further analysis demonstrates that firms favor higher inventory levels over more rigid costs when inventory-carrying costs decrease, fixed input costs increase, or downside risk escalates. |
| first_indexed | 2024-10-01T07:17:14Z |
| format | Journal Article |
| id | ntu-10356/178349 |
| institution | Nanyang Technological University |
| language | English |
| last_indexed | 2024-10-01T07:17:14Z |
| publishDate | 2024 |
| record_format | dspace |
| spelling | ntu-10356/1783492024-06-13T15:35:54Z Demand uncertainty, inventory, and cost structure Chang, Xin Kwok, Wing Chun Wong, George Nanyang Business School Business and Management Congestion costs Cost structure Building on Banker, Byzalov, and Plehn-Dujowich's (2014, The Accounting Review, 89(3), 839–865) congestion cost theory, we model firms' trade-off between a rigid cost structure and a high inventory level to reduce the congestion costs caused by uncertain demand. We demonstrate that firms with a higher inventory level adopt a less rigid cost structure, but the effect of cost structure on inventory is theoretically ambiguous. Using a large sample of manufacturing firms in the United States, we empirically investigate the dynamic interdependence between cost structure and inventory choices. Our results reveal that cost structure rigidity and inventory are negatively associated with each other over time, suggesting that they serve as substitutes in tackling demand uncertainty. Further analysis demonstrates that firms favor higher inventory levels over more rigid costs when inventory-carrying costs decrease, fixed input costs increase, or downside risk escalates. Ministry of Education (MOE) Published version We acknowledge financial support from the Ministry of Education (Singapore) (grant number RT01/19), the Ministry of Education (China) (18YJAZH004), the National Science Foundation of China (72072067 and 72132010), the 111 Project (B20094), and the Beijing Outstanding Young Scientist Program (BJJWZYJH01201910034034). 2024-06-12T07:26:58Z 2024-06-12T07:26:58Z 2024 Journal Article Chang, X., Kwok, W. C. & Wong, G. (2024). Demand uncertainty, inventory, and cost structure. Contemporary Accounting Research, 41(1), 226-254. https://dx.doi.org/10.1111/1911-3846.12918 0823-9150 https://hdl.handle.net/10356/178349 10.1111/1911-3846.12918 2-s2.0-85181527653 1 41 226 254 en RT01/19 Contemporary Accounting Research © 2023 Canadian Academic Accounting Association. All rights reserved. This article may be downloaded for personal use only. Any other use requires prior permission of the copyright holder. The Version of Record is available online at http://doi.org/10.1111/1911-3846.12918 application/pdf |
| spellingShingle | Business and Management Congestion costs Cost structure Chang, Xin Kwok, Wing Chun Wong, George Demand uncertainty, inventory, and cost structure |
| title | Demand uncertainty, inventory, and cost structure |
| title_full | Demand uncertainty, inventory, and cost structure |
| title_fullStr | Demand uncertainty, inventory, and cost structure |
| title_full_unstemmed | Demand uncertainty, inventory, and cost structure |
| title_short | Demand uncertainty, inventory, and cost structure |
| title_sort | demand uncertainty inventory and cost structure |
| topic | Business and Management Congestion costs Cost structure |
| url | https://hdl.handle.net/10356/178349 |
| work_keys_str_mv | AT changxin demanduncertaintyinventoryandcoststructure AT kwokwingchun demanduncertaintyinventoryandcoststructure AT wonggeorge demanduncertaintyinventoryandcoststructure |