Inventory overproduction and managerial ability

Abstract This study examines a sample of manufacturing firms in order to assess the relationship between overproduction levels with different levels of managerial ability. Using the managerial ability measure developed by Demerjian et al. (2012), this paper shows that firms with high levels of managerial ability have smaller size of overproduction. Furthermore, when overproduction occurs in firms with high levels of managerial ability, it is less likely to reverse in the following year and is more likely to be associated with future sales increases. Overall, the results suggest that high managerial ability firms generally avoid overproduction. High‐ability managers having fewer overproduction reversals suggest that they are less likely to use overproduction to manage earnings; instead, they are more likely to overproduce to build up inventory to expect higher future sales.