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Published in Portuguese and English. Original Version in Portuguese.
Periódico Trimestral, digital e gratuito publicado pela Academia Brasileira de Ciências Contábeis | Available online at www.repec.org.br
Revista de Educação e Pesquisa em Contabilidade
Journal of Education and Research in Accounting
Received in 11/13/2018. Ask to Revise on 9/28/2019. Resubmitted on 12/27/2019. Accepted on 12/27/2019 by Dr. Vinícius Gomes Martins
(Assistant Editor) and by Dr. Gerlando Augusto Sampaio Franco de Lima (Editor). Published on 3/31/2020. Organization responsible for the journal: Abracicon.
REPeC, Brasília, v. 14, n. 1, art. 7, p. 118-133, Jan./Mar. 2020 | DOI: http://dx.doi.org/10.17524/repec.v14i1.2041 | ISSN 1981-8610
Guilherme Cardoso
https://orcid.org/0000-0002-9266-4220 | E-mail: guilhermefc05@gmail.com
Dannie Carr Quirós
https://orcid.org/0000-0002-9266-4220 | E-mail: carr.dannie@gmail.com
Guilherme Santos Souza
https://orcid.org/0000-0001-8500-3021 | E-mail: guilhermessantos042@gmail.com
Karem Cristina de Sousa Ribeiro
https://orcid.org/0000-0003-2535-0421 | E-mail: kribeiro@ufu.br
Abstract
Objective: Decisions concerning inventory management involve a trade-o in which rms must choose
between keeping high inventory levels, thus decreasing the risk of product shortage, or keeping low
inventory levels and applying excess cash in other investments. Therefore, this paper addresses the
relationship between inventory management and performance.
Method: is sample is composed of non-nancial rms listed on Brazil’s stock exchange operator B3,
from 2010 to 2018. Because inventory is not relevant for all the companies included in the initial sample,
we applied a procedure using simple linear regression to rene the sample. Only rms with a signicant
relationship between inventory and sales continued in the sample. A quantitative approach based on
regression analysis was used to test the research assumptions.
Results: e results of the model that considers performance measuring from the perspective of aggregate
value show no relationship between inventory and performance. Robustness was veried using ROA to
measure performance from the perspective of protability. We found an inverted U relationship between
protability, the net trade cycle, and its square. at is, we found a non-linear relationship between the
variables, corroborating the idea that there is an optimal level between inventory and protability.
Contributions: As far as we know, this is the rst study investigating whether there is a point of inection
of inventory management and performance among Brazilian rms. e results present relevant and
practical guidelines for Brazilian rms and researchers addressing performance related to the net trade
cycle, as they suggest that Brazilian shareholders are not concerned with internal factors such as inventory
management, but rather with whether a rm is being protably managed.
Keywords: Inventory Management, Performance, Point of Inection.
Inventory management and performance
of Brazilian rms listed on B3
Inventory management and performance of Brazilian firms listed on B3
REPeC – Revista de Educação e Pesquisa em Contabilidade, ISSN 1981-8610, Brasília, v.14, n. 1, art. 7, p. 118-133, Jan./Mar. 2020 119
1. Introduction
Inventories are assets that make up the largest volume of short-term investments both in industry
and retail rms. Decisions concerning inventory management are complex because excess cash invested
in inventory overwhelms rms with high maintenance and opportunity costs. High inventory levels, on
the other hand, may increase sales revenues as costumers enjoy more exibility in making purchasing
decisions, decreasing the risk of going out of stock (Deloof, 2003). Therefore, efficient inventory
management inuences a rm’s operational eciency in seeking lower storage costs and greater costumer
loyalty.
Taking into account the dynamics of a rm’s investment decisions, much has been discussed about
the trade-o between investing in an asset and its impact on performance. Companies expect to maximize
their utility through inventory management frameworks that enable protable options between dierent
classes of assets. When dealing with inventory management, one should bear in mind the costs and
variables that might inuence investment in terms of acquisition, handling and sales. us, choosing
between technology and outsourcing may be a strategic decision that changes little in the long term
(Chauhan, 2019).
Based on these assumptions, Baños-Caballero, García-Teruel, and Martínez-Solano (2014) suggest
the existence of an inection point of inventory and performance. is implies the existence of an optimal
level of investment in working capital, which balances costs and benets and maximizes a rm’s value.
According to Kieschnick, Laplante, and Moussawi (2013), the expectation of future sales signicantly
inuences working capital management. As a result, companies are concerned with the possibility of
product shortage. As shown in Corsten and Gruen (2004), up to 43% of costumers are likely to opt for
another store when products are lacking.
Baños-Caballero et al. (2014) note that the assessment of inventories should take into account
not only indexes that measure its turnover. Credit policies available to costumers and from suppliers are
important as well. erefore, this study addresses inventory management considering the net trade cycle
(NTC). In this context, we attempt to verify how a trade-o in terms of inventory management aects
rms. What is the dierence between keeping high inventory levels and decreasing the risk of stock-outs,
or keeping low inventory levels and applying excess cash in other investments? is paper’s objective is to
assess the eects of inventory management on the performance of Brazilian rms and identify an inection
point in the net trade cycle of these rms.
e sample is composed of non-nancial Brazilian rms listed on B3 from 2010 to 2018. Because
inventory may not be a relevant factor in the revenues of all the companies included in the initial sample,
simple linear regression was performed to rene the sample to keep only those rms with a signicant
relationship between inventory and sales. To test the research assumptions, we used a quantitative
approach based on regression analysis. e results show that, from a protability perspective, there is an
inverted U relationship between protability, the net trade cycle, and its square. is means that a non-
linear relationship exists between the variables, corroborating the idea of an optimal level of inventory
and performance.
Guilherme Cardoso, Dannie Carr Quirós, Guilherme Santos Souza, Karem Cristina de Sousa Ribeiro
REPeC – Revista de Educação e Pesquisa em Contabilidade, ISSN 1981-8610, Brasília, v.14, n. 1, art. 7, p. 118-133, Jan./Mar. 2020 120
ese ndings present relevant practical guidelines for Brazilian rms and researchers investigating
performance concerning the net trade cycle. First, Brazilian shareholders are not concerned with internal
factors such as inventory management, but rather with whether a company is being protably managed.
Second, there is evidence of a non-linear effect of inventory management on performance, which
corroborates the idea that there is an optimal level between inventory and performance. ird, we present
a statistical tool to select relevant rms for this study to avoid selection bias. Inventory is an asset that
represents a relevant amount of short-term investments. is justies an investigation about the ideal
level of investment in inventory, performance and the creation of value, as it may improve our knowledge
of whether there is an ideal level of inventory. Finally, robustness tests were performed to decompose the
sample and variables, together with the generalized method of moments to deal with endogeneity issues.
e remainder of the paper is organized as follows: the second section presents the theoretical
framework; the third describes the method and sample; the fourth section discusses the results, and the
last section presents the nal considerations, as well as limitations and suggestions for future studies.
2. Theoretical framework
2.1 Working capital management
Companies exist in an uncertain context in which working capital management plays a key role
in maintaining their nancial health during the normal course of business (Scherr, 1989). A rm may
choose to allocate its working capital strategically and follow specic business models appropriate to
its comparative advantages such as a rm’s control over its resources, including management, or the
adoption of a specic technology in its specic sector (Chauhan, 2019). erefore, ecient working capital
management is an essential part of the overall strategy of any rm to create value for its shareholders
(Almeida & Eid Jr, 2014). As stated by Schi and Lieber (1974), both production and credit terms may
change over time due to seasonal changes in the demand curve and the establishment of rules to respond to
that demand. Acknowledging the interface between credit and inventory management results in improved
decision-making.
Companies subject to seasonal demand should be able to respond to expected demand deviations.
Operational responses available include a change in prices, implementing extra capacity to change the rate
of production, and establishing customer or product queues (Emery, 1987). Companies facing a process
of seeking resources for investment may adopt an aggressive working capital policy, pressing for lower
inventory levels and decreasing customer credit policies (Palombini & Nakamura, 2012). Investment in
accounts receivable and inventories represents a considerable part of corporate assets, while commercial
credit is an important source of resources for many companies (Baños-Caballero et al., 2014).
Deloof (2003) notes that many rms have a large amount of money invested in working capital, and
the way these resources are managed has a considerable impact on companies’ performance. With large
amounts invested in working capital, the management of these assets is expected to aect the performance
of companies considerably, and as a result, companies strive to obtain optimal working capital, paying
their bills as late as possible, delivering products quickly and collecting accounts receivable. is inection
point, however, may vary according to conditions (Enqvist, Graham, & Nikkinen, 2013), and the impact of
the institutional context on the net working capital depends on its current level (Baños-Caballero, García-
Teruel, & Martínez-Solano, 2019).
Inventory management and performance of Brazilian firms listed on B3
REPeC – Revista de Educação e Pesquisa em Contabilidade, ISSN 1981-8610, Brasília, v.14, n. 1, art. 7, p. 118-133, Jan./Mar. 2020 121
A complete measure of the net trade cycle that considers accounts receivable and inventory turnover
measure in the concept of operating cycle is a more appropriate way to represent liquidity management
compared to indicators of current liquidity or acid test ratio. Accounts receivable, inventory and accounts
payable are the main components of a company’s operating working capital. e ability of its nancial
manager to deal with these variables optimally (Prasad, Narayanasamy, Paul, Chattopadhyay, & Saravanan,
2019) determines the success of a rm. Entrepreneurs should choose between protability goals and risk
control. Working capital management is extremely important for rms with restricted access to capital,
but also when rms are expanding their investments in times of economic recovery (Le, 2019). Kieschnick
et al. (2013) add that the net trade cycle does not only concern cash management but also net operating
capital management, thereby, accounts receivable, inventory and use of commercial credit.
2.2 Inventory management and performance
Inventory management is one of the oldest concerns addressed in management studies. Companies
must adjust price and production processes according to seasonal markets and put up products for sale
(Scherr, 1989). Inventory management means understanding the context of business and making decisions
that balance current demand with future needs while maintaining overhead and operating costs at a
minimum. An inventory includes a rm’s raw material, processing products, inputs used in its operations,
and nished goods (Muller, 2011). e availability of cash ow may favor companies, improving their
performance, extending credit to costumers, increasing inventory in stock and paying in advance to obtain
cash discounts (Afrifa & Tingbani, 2018).
According to Deloof (2003), shareholder value can be created by decreasing the number of days
accounts receivable and keeping inventories to a reasonable minimum, while the negative relationship
between accounts payable and performance is consistent with the view that less protable companies wait
longer to pay their bills. Excessive and unnecessary investment in inventory and accounts receivable may
not benet a company and may result in low cash ow. Ecient management, however, may minimize
investment in inventory and accounts receivable and improve cash ow. Consequently, ecient working
capital management improves internal nancing sources to decrease external debt. Short-term loans
are subject to more frequent monitoring on the part of creditors. More frequent monitoring, then, may
decrease information asymmetry and renancing risks (Gill, Amiraslany, Obradovich, & Mathur, 2019).
According to Costa, Macedo, Câmara, and Batista (2013), the net trade cycle represents the period
in which a rm will eectively demand nancing for its activities. is cycle measures cash ow, covering
all its payments and receivables. e day sales outstanding, day sales of inventory, and days payable
outstanding respectively represent the ratio between the number of accounts receivable and sales in days,
between inventory and sales in days, and between accounts payable and sales in days. e following
formula is used to calculate this index:
𝑁𝑇𝐶 = 𝐷𝑆𝑂 +𝐷𝑆𝐼 −𝐷𝑃𝑂
(1)
Where: NTC = Net trade cycle; DSO=Day sales outstanding; DSI = Day sales of inventory; DPO =
Days payable outstanding.
Guilherme Cardoso, Dannie Carr Quirós, Guilherme Santos Souza, Karem Cristina de Sousa Ribeiro
REPeC – Revista de Educação e Pesquisa em Contabilidade, ISSN 1981-8610, Brasília, v.14, n. 1, art. 7, p. 118-133, Jan./Mar. 2020 122
Baños-Caballero et al. (2014) report an inverted U relationship between rms’ working capital and
performance. e authors suggest that an optimal level of investment in inventory and credit balances
costs and benets and maximizes performance. A rm may choose to keep very low inventory levels due
to the adoption of technology that permits just-in-time production. Another rm in the same industry
may choose to outsource its production and work with minimum xed assets, keeping its stock of nished
products as a guarantee. Choosing between technology and outsourcing may be a strategic consideration
that changes little over time (Chauhan, 2019). erefore, rms should attempt to keep their inventory
levels as close as possible to this point to avoid a shortage of products and loss of performance.
e trade-o in terms of inventory management aects companies, however, whether a rm should
keep high inventory levels and decrease the risk of a shortage of products, or keep inventories low and apply
excess cash in other investments is not a direct concern of shareholders. As stated by Jensen and Meckling
(1976), shareholders are rather concerned about how rms behave, that is, with whether the value of a
rm increases in the long run. Additionally, even if there is an ideal working capital level, companies in
emerging markets may not be able to achieve that level given nancial or managerial constraints (Chauhan
& Banerjee, 2018). erefore, the following hypothesis is proposed:
H0: ere is no relationship between inventory and performance
Inventories’ main role is to buer rms against uncertainties. Hence, a company keeps inventory to
cope with uncertainties concerning market demand and, according to Baños-Caballero et al. (2014), high
inventory levels may decrease supply costs and price uctuations and prevent product shortages. e idea
of special orders of missing items with no additional cost to costumers, assuming there will be increased
sales and decreased inventory shortage, may increase protability. Greater variability in demand when
manufacturers have additional pricing exibility may be favorable (Gupta, Gurnani, & Chen, 2010). Higher
inventory levels protect rms from adversities related to inputs’ price uctuations and minimize the loss
of sales due to a potential shortage of products in stock (Panda & Nanda, 2018).
ere is, however, a downside to the decision to keep high inventory levels. e reason is that high
inventory levels prevent the adoption of technology that would enable a company to produce just in time
and decrease costs (Chauhan, 2019). Additionally, excessive inventory decreases a company’s ability to
respond to a constantly changing market, possibly harming sales (Kim & Kim, 2016). Higher levels of
working capital indicate a need for additional capital that involves nancial and opportunity costs; high
levels of capital also represent greater expenses with interest as a result, and therefore, greater credit risk
(Kieschnick, LaPlante, & Moussawi, 2006). Additionally, keeping high levels of working capital means that
money is committed with short-term activities (Deloof, 2003), that is, large investments with working
capital may also harm a company’s ability to work with other projects that aggregate value.
Verifying this trade-o between investing or not in short-term assets and the performance of
Brazilian rms means that an inection point of inventory and performance exists. Decisions related to
inventory management are complex, considering that excess money invested in inventory overwhelms
rms with high maintenance and opportunity costs. High inventory levels, however, help increase sales
as clients have more exibility to make purchasing decisions and rms decrease the risk of a shortage of
products for sales. Based on these assumptions, the following hypotheses were established:
H1: ere is a positive relationship between lower inventory levels and performance.
H2: ere is a negative relationship between higher inventory levels and performance.
Inventory management and performance of Brazilian firms listed on B3
REPeC – Revista de Educação e Pesquisa em Contabilidade, ISSN 1981-8610, Brasília, v.14, n. 1, art. 7, p. 118-133, Jan./Mar. 2020 123
3. Method
3.1 Sample and data
is study’s sample is composed of Brazilian companies listed on B3 between 2010 and 2018. All
companies active any time during the study period were considered for inclusion to avoid selection bias,
also known as survival bias. Data were imported from the Economática database. is period was chosen
because 2010 was when Brazilian companies started adopting the International Financial Reporting
Standards (IFRS). Additionally, this study only considered non-nancial companies given the accounting
and nancial characteristics inherent to nancial rms, while accounting values were deated according
to the Índice Preços ao Consumidor Amplo (IPCA) [Extended National Consumer Price Index]. e
values were deated due to changes in the general price level during the period. Uncorrected numbers
are misleading as they give the wrong impression of a real increase in the stock market.
Previous studies (Elsayed & Wahba, 2016; Gill et al., 2019; Kroes & Manikas, 2014; Shah & Shin,
2007) addressing the inventory and performance issue assign dierent degrees of importance to a sector’s
specic environment. Hence, this study rened the sample to include only companies that present a
signicant relationship between inventory and revenue. is approach leads to more precise results on how
a company’s performance may be aected by its inventory level. e reason is that there are companies,
or even sectors, such as Soware and Programming, in which inventories are not important for revenues.
A statistical procedure was applied to maintain this separation. Simple linear regression was used
between total sales and inventory to determine which companies had signicant levels of inventory
over their sales considering a level of signicance at 10%. e initial sample consisted of non-nancial
companies and, after applying the technique, the sample was restricted to those companies with a
signicant relationship between inventory and operation, in which 1,050 observations were identied.
Table 1 presents a detailed summary of the data collected from this sample and the rening process.
Table 1
Sample summary
Period
2010 2011 2012 2013 2014 2015 2016 2017 2018
Firms 436 438 431 428 420 406 403 396 386
Financial rms (36) (39) (39) (39) (40) (39) (37) (35) (35)
Non-nancial rms 400 396 392 389 380 367 366 361 351
Inventory-related rms 128 132 135 129 124 121 124 121 118
Note: Detailed summary of sample data collection and renement process. Data provided by Economática.
Guilherme Cardoso, Dannie Carr Quirós, Guilherme Santos Souza, Karem Cristina de Sousa Ribeiro
REPeC – Revista de Educação e Pesquisa em Contabilidade, ISSN 1981-8610, Brasília, v.14, n. 1, art. 7, p. 118-133, Jan./Mar. 2020 124
3.2 Denition of variables
is paper is based on the study of Baños-Caballero et al. (2014), which addresses the relationship
between inventory management and performance of Brazilian non-nancial companies. e net trade
cycle (NTC) is considered as an explanatory variable. NTC corresponds to the number of day sales
outstanding plus day sales of inventory minus days payables outstanding. According to the study used
to ground this paper, inventory assessment should not be seen only from the perspective of indexes that
measure its turnover, but credit policies available to costumers and from suppliers should also be taken
into account.
e model-dependent variable is Performance (PERF), which is the ratio of market value equity and
the book value of debt and the book value of assets and is used in previous studies addressing the relationship
between net trade cycle and performance (Baños-Caballero et al., 2014; Kieschnick et al., 2013).
Four additional control variables were added to ensure a better t of the model, namely:
(a) Size of the company (SIZE): the size of a company may inuence its working capital management.
Larger companies may demand higher investments in working capital given higher levels of sales, and also
because of their size, these rms may be able to establish relationships with suppliers, which are important
to decrease investments in working capital (Kieschnick et al., 2006). In this study, the rms’ sizes were
calculated using the logarithm of total assets.
(b) Leverage (LEV): the degree of debt inuences decisions related to inventory management. Gill,
Biger, and Mathur (2010) present a signicant negative relationship with performance, which means that
the higher a rm’s leverage, the worst its performance. In this study, leverage was calculated by the ratio
between total debt and total assets.
(c) Protability (PROFIT): protability is measured using gross operating prot, dened as sales
minus cash cost of sold products and is divided by the total assets minus nancial assets (Deloof, 2003).
In this study, PROFIT refers to the operating prot on total assets
(d) Growth opportunity (GROW): in this study, the growth opportunity is measured by the ratio
of the book value of intangibles, assets, and total assets, as reported in Baños-Caballero et al. (2014). is
variable shows investment in assets that provide new sources of growth.
e variables used in this study are represented in Table 2:
Table 2
Summary of variables
Variables Acronym Denition Expected
Signal
Base
Studiesª
Explanatory Variable
Net trade cycle NTC Sum of days sales outstanding, day sales of
inventory and days payable outstanding (+) (-) (1) (6)
Dependent Variable
Performance PERF
Ratio of the sum of the market value of equity
and the book value of debt to the book value
of assets
(1) (2) (7)
Control Variables
Firm Size SIZE Natural logarithm of sales (+) (1) (2) (3) (4)
Leverage LEV Ratio of total debt to total assets (-) (1) (3)
Protability PROF Return on assets (+) (1) (4)
Growth Opportunities GROW Book value of intangible assets to total assets (+) (1)
Note: (a) Underlying studies: (1) Baños-Caballero et al. (2014); (2) Kieschnick et al. (2013); (3) Palombini & Nakamura (2012);
(4) Deloof (2003); (5) Afza & Sajid (2008); (6) Shin and Soenen (1998); (7) Almeida & Eid Jr (2014).
Inventory management and performance of Brazilian firms listed on B3
REPeC – Revista de Educação e Pesquisa em Contabilidade, ISSN 1981-8610, Brasília, v.14, n. 1, art. 7, p. 118-133, Jan./Mar. 2020 125
3.3 Technical analysis model
is study’s data were treated in Stata using Multiple Regression and panel data, which according to
Wooldrige (2016) simultaneously analyzes variations of individual units over time. e following multiple
regression model was proposed to test non-linearity of inventory behavior with performance and its
signicance among non-nancial Brazilian companies listed on B3:
(2)
Tests were performed for this regression model to verify the best model to be used and also to detect
and treat the presence of outliers, multicollinearity, heteroscedasticity, and autocorrelation. Additionally,
NTC square was included to show the inuence of NTC non-linearity on performance, following the
approach of Baños-Caballero et al. (2014). We also used the generalized moment method to deal with
endogeneity issues based on the estimator proposed by Arellano and Bond (1991).
erefore, it is possible to determine the inection point of performance using the net trade cycle
coecients, which is calculated according to the formula:
=−1/22
(3)
Where: β1 is the coecient of a variable in the linear form and β2 is the coecient in the square
form. e point of inection is a point in the curve where the sign of curvature changes and, in this
case, the optimal size of the inventory. In this stage, a dierent relationship of signs between the rst and
second angular coecient is expected, following a non-linear approach that represents the presence of an
inection point of inventory and performance.
4. Results
is section presents a discussion of the results. e objective is to show the relationship between
inventory management and performance. We intend to verify the existence of a non-linear relationship
between variables, due to the existence of an inection point in this relationship. Finally, this paper
presents an analysis of results concerning verication of robustness. Data in this study were obtained
from the Economática database and the sample corresponds to non-nancial Brazilian rms listed on B3
from 2010 to 2018. Outliers were treated with the winsorization technique at 0.05 in each tail.
4.1 Descriptive statistics
Before analyzing the results, we present descriptive data, showing the composition of data in the
proposed model. Table 3 presents the number of observations, mean, standard deviation, maximum
and minimum, and some descriptive statistics in the regression model, which show that the average
performance is 0.98%, with an average net trade cycle of 104.43 days.
Guilherme Cardoso, Dannie Carr Quirós, Guilherme Santos Souza, Karem Cristina de Sousa Ribeiro
REPeC – Revista de Educação e Pesquisa em Contabilidade, ISSN 1981-8610, Brasília, v.14, n. 1, art. 7, p. 118-133, Jan./Mar. 2020 126
Table 3
Descriptive statistics
Variables Observations Mean Standard Deviation Minimum Maximum
PERF 1,194 0.9829984 1.19344 -.2577339 24.18373
NTC 1,143 104.4276 138.0656 -391.6232 531.4668
SIZE 1,412 21.04444 2.217196 10.52451 26.79697
LEV 1,442 0.3340592 0.3235645 0 7.009169
PROF 1,441 0.6208512 22.83619 -10.35011 866.7535
GROW 1,252 0.2397398 4.749309 -3.727607 121.8832
Notes: Variables: PERF – Performance; NTC – Net trade cycle; SIZE – Logarithm of sales; LEV- Leverage; PROF – Protability;
GROW – Growth Opportunities.
Table 4 presents the correlation matrix of the proposed model. Data show that variables have a low
mutual correlation (all below 0.5), which corresponds to a good endogeneity index and autocorrelation
of regressors. Additionally, VIF was used to check for multicollinearity between the variables. e mean
VIF in the model was 3.20, which shows that there is no multicollinearity problem.
Table 4
Correlation Matrix
PERF NTC SIZE LEV PROF GROW
PERF 1.0000
NTC -0.1785*** 1.0000
SIZE 0.1640*** -0.2287*** 1.0000
LEV -0.0136 -0.0223 0.1410*** 1.0000
PROF 0.4339*** -0.2264*** 0.3511*** -0.0806*** 1.0000
GROW 0.1430*** -0.2384*** 0.2852*** 0.0236 0.3668*** 1.0000
Notes: Variables: PERF – Performance; NTC – Net trade cycle; SIZE – Logarithm of sales; LEV- Leverage; PROF – Protability;
GROW – Growth Opportunities.
*, **, *** Signicant at 10%, 5% and 1%, respectively.
4.2 Effects of net trade cycle on the performance of aggregate value
Non-linear regression with xed eects was used to check the relationship between performance
and net trade cycle. is model was chosen based on the tests proposed in the method section and the
results are presented in Table 5. It is important to note that the net trade cycle represents lower inventory
levels and that its square refers to higher inventory levels. e idea of a non-linear approach is to show the
point on the curve in which the sign changes, i.e., optimal inventory size.
e results obtained in the proposed model conrm this study’s null hypothesis (H0), in which
there is no relationship between the net trade cycle and the performance of Brazilian non-nancial rms.
It implies that there is no inection point between the performance and net trade cycle of Brazilian non-
nancial rms in the period under analysis as the two coecients of the net trade cycle (NTC and NTC2)
were not signicant. is nding may be analyzed from the perspective of inventory shortage. Inventory
levels aect a company’s performance due to a shortage of products and the likelihood of losing clients,
and thereby sales, as shown in Corsten and Gruen (2004).
Inventory management and performance of Brazilian firms listed on B3
REPeC – Revista de Educação e Pesquisa em Contabilidade, ISSN 1981-8610, Brasília, v.14, n. 1, art. 7, p. 118-133, Jan./Mar. 2020 127
As the results show, the variables introduced in this study to control for potential inuences on the
performance of companies, were signicant. erefore, there are three signicant variables in the proposed
model. e size of rms is signicantly negative while the level of debt and protability are signicantly
positive for the rms’ performance. Additionally, note that size, leverage, and protability are strongly
related to performance measured by the rms’ values.
Note that other factors related to inventory management and credit policies aect the performance
of Brazilian non-nancial rms in the period under analysis. erefore, the companies in the analysis
did not present an inection point with the net trade cycle and performance, which would indicate an
optimal level of inventory.
Table 5
Estimated Results
Model Variables PERF – Performance (Tobin’s Q)
Expected signal Fixed eects model
Intercept 3.5309***
NTC (+) -0.0449
NTCSQ (-) 0.0041
SIZE (+) -0.1343***
LEV (-) 0.6055***
PROF (+) 1.2100***
GROW (+) 0.0208
Observations 1050
Year Dummy Yes
Adjusted R-Squared 0.148
Notes: PERF is Tobin’s Q; NTC is the net trade cycle divided by 100 and NTC2 is its square; SIZE the size; LEV
the leverage; GROWTH the growth opportunities; and ROA the return on assets.
*, **, *** Signicant at 10%, 5% and 1%, respectively.
4.3 Robustness Check
To verify the results’ empirical and theoretical robustness, the same analyses were performed using
Return on assets (ROA) as the dependent variable. Baños-Caballero et al. (2014) use this same approach to
verify robustness and the same results were found when performance was analyzed from the perspective
of value and protability, while Deloof (2003) presents a signicant negative relationship between gross
operating income and net trade cycle.
Table 6 shows that the use of performance measured by ROA implies that there is an optimal point
in inventory management and performance because the regression results show an inverted U relationship
between protability, net trade cycle, and its square. erefore, these results corroborate the ndings of
Baños-Caballero et al. (2014), Baños-Caballero et al. (2019), Le (2019) and Panda and Nanda (2018). us,
the coecients of the net trade cycle variable allow us to determine in this sample an inection point
between the rms’ performance and net trade cycle. e inection point found here was 256.62 days, i.e.,
the model’s inection point that represents the optimal structure of NTC in terms of performance.
Guilherme Cardoso, Dannie Carr Quirós, Guilherme Santos Souza, Karem Cristina de Sousa Ribeiro
REPeC – Revista de Educação e Pesquisa em Contabilidade, ISSN 1981-8610, Brasília, v.14, n. 1, art. 7, p. 118-133, Jan./Mar. 2020 128
e results show that lower levels of inventory improve performance due to the possibility of rms
increasing and improving their sales and credit policies as shown by Baños-Caballero et al. (2014), Baños-
Caballero et al. (2019), Le (2019), and Panda and Nanda (2018). e second time when higher inventory
levels are related to a fall in performance shows that higher inventory levels result in low working capital,
too long credit policies and cost of opportunities lost. ese results corroborate the ndings reported by
Baños-Caballero et al. (2014); Deloof (2003); Kieschnick et al. (2013). When assessing performance from
a protability perspective, hypotheses H1 and H2 would be conrmed, in which low inventory levels are
positively related to performance and high inventory levels are negatively related to performance.
Table 6
Estimated results of the robustness check
Model Variables Value Outlook Protability Outlook
PERF - Tobin’s Q ROA – Return on assets
Intercept 3.5309*** -0.2200
NTC -0.0449 0.0349**
NTCSQ 0.0041 -0.0068***
SIZE -0.1343*** 0.0139*
LEV 0.6055*** -0.0995**
PROF 1.2100***
GROW 0.0208 0.0469***
Observations 1050 1241
Year Dummy Yes Yes
Adjusted R-Squared 0.148 0.142
Notes: The PERF is Tobin’s Q; NTC is the net trade cycle divided by 100 and NTC2 is its square; SIZE=size; LEV=leverage;
GROWTH=growth opportunities; and ROA=return on assets.
*, **, *** Signicant at 10%, 5% and 1%, respectively.
erefore, this study shows that the relationship between the net trade cycle and the performance of
Brazilian rms is not signicant when portrayed from the perspective of value, meaning that shareholders
only consider whether a company is being profitable. An analysis of Brazilian companies from the
perspective of protability reects companies’ decision-making, which is based on increased performance
to achieve objectives. Companies also take into account the net trade cycle as an important variable that
presents an optimal level of performance.
Additionally, the independent variable was divided to test part of the NTC separately and verify
whether the results are conrmed (Table 7). e results corroborate the idea that ecient inventory
management reects on rms’ operational eciency in seeking lower inventory costs and greater customer
loyalty because valorization of inventory should not be analyzed only taking its turnover into account;
credit policies to clients and from suppliers should be taken into account as well. erefore, these results
show that a non-linear relationship is not presented in terms of inventory separately, but as a whole, in
combination with credit policies for clients and from suppliers.
Inventory management and performance of Brazilian firms listed on B3
REPeC – Revista de Educação e Pesquisa em Contabilidade, ISSN 1981-8610, Brasília, v.14, n. 1, art. 7, p. 118-133, Jan./Mar. 2020 129
Table 7
Estimated results of the robustness check (decomposition of independent variables)
Model
Variables
Value Outlook Protability Outlook
PERF PERF PERF ROA ROA ROA
Intercept 3.4512*** 3.4035*** 3.6423*** -0.2938* -0.2024 -0.2084
DSO -0.1629 0.0044
DSOSQ 0.0454* 0.0003
DSI -0.2014 -0.0111
DSISQ 0.0490 -0.0039
DPO -0.3870** -0.1285***
DPOSQ 0.1541* 0.0518***
SIZE -0.1288*** -0.1263*** -0.1364*** 0.0181** 0.0145* 0.0159**
LEV 0.6175*** 0.6181*** 0.6335*** -0.1076*** -0.1080*** -0.1005**
PROF 1.1910*** 1.1881*** 1.0978***
GROW 0.0305 0.0147 0.0208 0.0507*** 0.0472*** 0.0466***
Observations 1050 1050 1050 1241 1241 1241
Year Dummy Yes Yes Yes Yes Yes Yes
Adjusted
R-Squared 0.151 0.150 0.156 0.127 0.135 0.155
Notes: The PERF is Tobin’s Q; DSO is days sales outstanding divided by 100 and NTC2 is its square; DSI is days sales
inventory divided by 100 and NTC2 is its square; DPO is days payable outstanding divided by 100 and NTC2 is its square;
SIZE the size; LEV the leverage; GROWTH the growth opportunities; and ROA the return on assets.
*, **, *** Signicant at 10%, 5% and 1%, respectively
Finally, the generalized moments method(GMM) was used to deal with potential endogeneity
problems as mentioned in the method section. Based on Arellano and Bond (1991), the models were
estimated using the GMM estimator in two stages, which permit controlling for endogeneity using
instruments. Specically, the dependent variables were lagged in four periods and used in the models as
instruments in the dierent equations, following the procedures of Baños-Caballero et al. (2014). is
approach concerns endogeneity problems, in that the relationships between rms’ performance and
specic characteristics only reect the eect of independent variables on their performance. e results
are in agreement with previous results, as shown in Table 8, concerning a non-linear relationship between
inventory and protability, but not the aggregated value variable. is corroborates the idea that Brazilian
shareholders are not concerned with internal factors, such as the role of inventory management as a factor
that creates value.
Guilherme Cardoso, Dannie Carr Quirós, Guilherme Santos Souza, Karem Cristina de Sousa Ribeiro
REPeC – Revista de Educação e Pesquisa em Contabilidade, ISSN 1981-8610, Brasília, v.14, n. 1, art. 7, p. 118-133, Jan./Mar. 2020 130
Table 8
Estimated results of the endogeneity check using GMM models
Model Variables Value Outlook Protability Outlook
PERF - Tobin’s Q ROA – Return on assets
Intercept 3.9944*** 0.1766
L1.IV 0.2811** 0.3388***
L2.IV -0.2163** -0.1286**
L3.IV -0.0188 0.0872*
L4.IV 0.0379 -0.0732
NTC -0.0364 0.0535***
NTCSQ -0.0218 -0.0077***
SIZE -0.1543*** -0.0068
LEV 0.5237 -0.1175*
PROF 0.3405
GROW 0.1463*** 0.0517***
Observations 453 579
Wald Chi-Square 42.29 82.36
Prob. Chi-square 0.00 0.00
Notes: The instrumental variables used are the four lagged dependent variables ranging from L1.IV to L4.IV; PERF is
Tobin’s Q; NTC is net trade cycle divided by 100 and NTC2 is its square; SIZE=size; LEV=leverage; GROWTH=growth
opportunities; and ROA=return on assets.
*, **, *** Signicant at 10%, 5% and 1%, respectively.
5. Conclusions
is study’s objective was to assess the eects of inventory management on rms’ performance and
identify the existence of an inection point of net trade cycle among non-nancial companies listed on B3
from 2010 to 2018. Non-linear multiple regression was used and data were collected from Economática.
e sample is composed of Brazilian non-nancial companies listed on B3. Simple linear regression was
applied to each company and all companies presenting a signicant relationship between inventory and
revenue were selected. e nal sample consisted of 92 companies with 557 observations per rm/year.
e results conrm hypothesis H0, that is, there is no relationship between net trade cycle and
performance. e reason is that the model using Tobin’s Q to measure performance does not present a
signicant relationship between net trade cycle (NTC and NTC2) coecients and performance measured
from the rms’ value perspective. When rms are assessed from the perspective of prot (ROA), however,
the results show the presence of an inverted U relationship between the net trade cycle and performance.
ese results are in line with Baños-Caballero et al. (2014), who shows the existence of an optimal
inventory level. In this study, this level corresponds to 256.62 days.
Inventory management and performance of Brazilian firms listed on B3
REPeC – Revista de Educação e Pesquisa em Contabilidade, ISSN 1981-8610, Brasília, v.14, n. 1, art. 7, p. 118-133, Jan./Mar. 2020 131
ese results present relevant practical guidelines for Brazilian companies and researchers analyzing
performance related to the net trade cycle. First, as the results show the presence of an inection point of
net trade cycle and protability, companies can optimize asset management in the short term. Second,
these results indicate dierences between value and protability perspectives in Brazilian rms. ey
suggest that Brazilian shareholders are not concerned with inventory management, but rather with
whether a company is protably managed. Inventories are an asset that represents a relevant amount of
investments in the short term. erefore, identifying the existence of an optimal level between investment
in inventory and performance and value creation is important because it contributes to improving our
understanding of whether there is an optimal inventory level.
This study’s limitations include the fact that external factors that influence decision-making
concerning performance, such as macroeconomic events and regulation policies, were not addressed in
this analysis. us, they may have inuenced the results. erefore, we should bear in mind that not only
factors inherent to working capital management and inventory management inuence performance.
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