A) Briefly discuss what you would expect to see in these results if firms are engaging in over-production. Assume that investors are fooled by the increase in absorption costing income created by over-production (i.e., the stock price is too high at the end of the last quarter). Also, assume that investors figure out that they have been fooled in the subsequent quarter leading to negative subsequent quarter stock returns (i.e., the “Next QTR Return” column). What relationship would you expect to see between “NI Difference” and “Next QTR Returns,” or between “Inv Change” and “Next QTR Returns.”
B) Briefly discuss whether or not there is any evidence of the relationships you discussed above (Part 7, A). Does it appear that any companies are over-producing in the first place? Are there firms that do appear to have over-produced, but still have positive subsequent stock returns? Discuss subjective and objective information leading to these answers.