Information Content of Order Backlog Conditional on the Direction of Sales Change

• In Event: Potpourri II

Abstract

We examine the information content of order backlog conditioned on a change in sales. We find order backlog has stronger positive news when sales decrease than when sales increase. On average, order backlog indicates a future increase in sales, and a current sales decrease suggests the likelihood of a further decrease in sales. However, order backlog conditional on a sales decrease suggests that the negative news or risk of a further decrease in sales is unlikely. In other words, an additional unit of order backlog has more good news when sales decrease We find that an additional unit of order backlog predicts a greater increase in future earnings when sales decrease than when sales increase. Consistent with our finding that order backlog predicts higher future earnings when sales decrease, analysts’ upward adjustment of one-year-ahead earnings forecasts and positive market reactions to order backlog are stronger when sales decrease. Overall, our results suggest that a leading indicator such as order backlog may help to resolve uncertainty arising from a sales decrease and also make earnings more predictable.

Authors

• Rajiv D Banker, Temple University

• Russell Barber, University of Colorado - Denver

• Dana Hollie, University of Toledo

• Han-Up Park, University of Saskatchewan