The Effects of Business Strategy and Inventory on the Relationship between Sales Manipulation and Future Profitability

Abstract

Many researchers have found that real activities manipulation undermines future profitability, because it deviates from normal operating activities. We are interested in sales manipulation, which is one type of real activities manipulation relating to corporate sustainability. First, we empirically examine whether the effects of sales manipulation on future profitability differ according to the strategies of a firm. Next, we divide sales manipulation as a type of real activities manipulation and optimal sales manipulation and then examine how the two types of sales manipulation affect future profitability. Finally, we examine how the effects of optimal sales manipulation on future profitability differ according to the firm's strategies. The empirical findings show that the association between sales manipulation and future profitability is more negative (-) for a product differentiation strategy than for a cost leadership strategy. Further, the sales manipulation performed by firms with a high proportion of the starting inventory and a decrease in the inventory during the current year has a positive (+) impact on future profitability. Our results contribute to the literature on business strategy by presenting evidence that core management activities are related to future financial performance, according to the business strategy. In addition, our research shows that sales manipulation can turn into an optimal operating activity, depending on the firm's situation.