Analysing the link between inventory and financial performance, Shah and Shin (2007) discover improved
inventory performance (i.e. lower inventory levels) with positively related financial performance for the US
manufacturing industry as a whole. Swamidass (2007) argues that inventory holding could be a function of the
firms’ financial performance, observing that top performers reduced inventories significantly during the period 1981
to 1998, whereas low performers showed a surprising increase in inventories, carrying more inventory than topperforming
firms. Considering the levels, Swamidass finds that bottom performers show higher inventory-to-sales
ratios. Cannon (2008) finds no significant link between inventory improvements and firm performance of US
manufacturing firms between 1991 and 2000. In his empirical study, better inventory performance was associated
with better financial performance for some firms while for many firms this remained unchanged. Some firms showed
even worse financial performance associated with better performing inventories. Capkun et al. (2009) continue this
stream of inventory performance studies for US manufacturing firms. Over a 26-year period from 1980 to 2005, they
find a significant relationship between lower inventory to sales ratios and the profitability of firms across a broad
range of industries. Obermaier and Donhauser (2009) perform a sensitivity analysis to grasp some insights into the
relationship between inventory reduction and financial performance, using firm-level data on German firms.
Although the results of a ceteris paribus analysis should be handled with care, they find that the potential
contributions of inventory improvements to the financial performance of firms would only be a small amount.
Apart from their work we found no recent empirical study concerned with the financial effects of changes in
inventory holdings on the performance of either German firms or any other major European firms. Obviously there
is a lack of consensus regarding the relationship between inventory holding and overall firm performance. This
article is an attempt to fill this gap by explicitly analysing the relationship between inventory holding and firm
performance for a large sample of German firms, using financial metrics.