Comparing The Performance And Importance Of Trade And Inventory Policies Of Large Cap And Mid Cap Retailers

Abstract

A companys trade and inventory policies determine the holding periods incurred to collect the accounts receivable, to convert inventories into sales, and to pay off the accounts payable. In this study, holding days for accounts receivable (AR), inventories (IV), and accounts payable (AP) of large cap and mid cap retailers for the years 2008 to 2012 were analyzed, compared, and regressed on return on assets (ROA). Results indicate that these holding days remain constant over time despite the late 2007 to mid-2009 U.S. recession. Comparative results show large cap retailers have shorter AR, same IV, and longer AP than mid cap retailers. Regression results conclude that for both large cap and mid cap retailers, IV is not correlated while shorter AR (collect sooner) is correlated with higher ROA. For large cap retailers, longer AP (pay later) is correlated with higher ROA, but for mid cap retailers, shorter AP (pay sooner) is correlated with higher ROA. Difference in bargaining power is suggested as the explanation for this discrepancy.