Detecting overproduction: Evidence from inventory write‐down

Abstract

We use inventory write‐downs to differentiate opportunistic and non‐opportunistic overproduction measures. We posit that non‐opportunistic overproduction is positively associated with future write‐downs because overproduction generally leads to excess inventory, while opportunistic overproduction (to inflate earnings) is negatively associated with write‐downs because write‐downs decrease earnings. We find that change‐based proxies (deviations from past behaviour) are positively associated with the likelihood of future write‐downs, whereas residual‐based proxies (deviations from industry norms) are negatively associated with this likelihood, suggesting that the former (latter) primarily capture non‐opportunistic (opportunistic) overproduction. Our study highlights the importance of using appropriate overproduction measures for each research setting.