decrease of inventory ratios despite any increased focus on inventory reduction and
Boute et al. (2006), who concluded that companies with very high inventory ratios have
more possibilities to be bad financial performers. This is consistent with the findings of
Shin and Soenen (1998), which reported a strong negative relation between the cash
conversion cycle and corporate profitability for a large sample of public American
firms. Chen et al. (2005) by examining how the market values the firms with respect to
their various inventories policies, reported that firms with abnormally high inventories
have abnormally poor stock returns, firms with abnormally low inventories have
ordinary stock returns while firms with slightly lower than average inventories
perform best over time. Furthermore, in a more recent study, Shah and Shin (2007)
examined the empirical associations among three constructs – inventory, IT
investments and financial performance – using longitudinal data that span four
decades, where they conclude that reducing inventories has a significant and direct
relationship with financial performance.