October 2008

Demand-supply mismatches caused by product introduction delays, excess inventory, and supply chain disruptions lead to a major increase in firms’ equity volatility, according to a new Georgia Tech College of Management study.

"This study shows that demand-supply mismatches are associated with a 25 percent increase in volatility — an increase that persists for at least two years," says Georgia Tech operations management professor Vinod Singhal, who conducted the study with Kevin B. Hendricks of Wilfrid Laurier University.

"In contrast, a corporate event like CEO turnover only causes a six percent increase in equity volatility."

Most Harmful

The researchers found that product introduction delays were more harmful to equity volatility than excess inventory or supply chain disruptions.

"Volatility changes are important because they can affect the underlying economics of a firm in a number of ways," Singhal says. "For example, they can increase the cost of capital leading to lower stock prices. Also, suppliers and customers may be wary of dealing with a high-risk firm, and increased volatility can limit the willingness of lenders to extend credit causing liquidity problems."