The Information Content of Operational Efficiency

We address whether and why a firm’s operational efficiency has information content for investors and whether it is associated with prolonged price discovery at quarterly earnings announcements. We measure operational efficiency using the cash conversion cycle (CCC), where shorter CCC reflects better operational efficiency. We find that CCC has information content for investors in that shorter CCC is positively related to abnormal stock returns and trading volume at quarterly earnings announcements. We also find that shorter CCC is associated with higher future earnings and cash flows, which helps explain the positive announcement return reaction. We find that CCC is associated with prolonged price discovery in that shorter CCC is associated with less timely and less efficient price discovery at quarterly earnings announcements and larger post-earnings-announcement drift. However, these findings largely are attributable to firms that announce bad earnings news. Our findings are of interest to regulators who seek to improve the informational efficiency of stock prices, managers who seek to understand the extent to which stock prices reflect information about firms’ operations, and investors who base trading decisions on accounting information.