The Information Content of Operational Effectiveness

We address whether and why a firm’s operational effectiveness, OpEff, has information content for investors and what role that information plays in the price discovery process at quarterly earnings announcements. We measure OpEff using the cash conversion cycle (CCC) multiplied by –1, such that higher OpEff reflects better operational effectiveness. Higher OpEff is associated with higher abnormal stock returns and trading volume at earnings announcements and with higher future earnings and cash flows, which helps explain the positive return and volume relations. Higher OpEff also is associated with larger post-earnings-announcement drift and less timely incorporation of information in earnings announcements into stock prices. However, this relation largely is attributable to firms that announce bad earnings news. Together, we infer that operational effectiveness is informative to investors because it comprises forward-looking information about earnings and cash flows and that announcements of improvements in OpEff along with bad earnings news impede the price discovery process.