Does the Bullwhip Matter Economically?

A Cross-sectional Firm-Level Analysis

Opher Baron*, Jeffrey L. Callen* and Dan Segal**

*Rotman School of Management

University of Toronto
105 St. George St.
Toronto Ontario, Canada M5S 3E6
opher.baron@rotman.utoronto.ca
callen@rotman.utoronto.ca
Phone: 416-946-5641

**Arison School of Business

Interdisciplinary Center
Herzliya, Israel 46510
dsegal@idc.ac.il
Phone: (972) 509-969-612
 Does the Bullwhip Matter Economically? A Cross-sectional
Firm-Level Analysis

ABSTRACT

This paper investigates whether the bullwhip effect has economic consequences at the

firm level. The bullwhip effect refers to the amplification of demand variability from a

downstream site to an upstream one. Simply put, the bullwhip effect manifests when

input production (in the case of manufacturing firms, orders in the case of retailers) is

more volatile than output/product demand. In particular, we examine the relation

between the bullwhip and various accounting/financial performance measures

including equity returns, cash flows, operating costs, earnings, and earnings attributes

such as earnings persistence, using a large panel of cross-sectional firm-level data.

Performance is measured both in terms of first-moment mean effects and second-

moment volatility effects. Contrary to the maintained assumption of operations

management scholars, our analysis yields results that are inconsistent with the notion

that the bullwhip has significant negative economic consequences at the firm level. In

particular, we find almost no significant statistical/economic relations between

accounting/financial measures of profitability and the bullwhip, both with and without

covariate controls. These results are also robust after controlling for the potential

endogeneity of the bullwhip.

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1. Introduction
The bullwhip effect refers to the amplification of demand variability from a

downstream site to an upstream one. Simply put, the bullwhip effect manifests when input

production (in the case of manufacturing firms, orders in the case of retailers) is more volatile

than output/product demand. A not inconsiderable amount of intellectual ink has been spilt on

the bullwhip effect. At last count, Google Scholar citations for “bullwhip effect” exceed 19,000.

The two seminal papers on the bullwhip by Lee et al. (1997a, b) have in excess of 8,500 citations

in total. Academic interest in the bullwhip is also supported by anecdotal evidence. Companies

such as Caterpillar, Proctor & Gamble, Hewlett-Packard and Walmart among others have

reported on inventory management issues engendered by the bullwhip effect.

The inordinate amount of interest exhibited by operations management scholars in the

bullwhip is difficult to explain unless these scholars are assuming, perhaps implicitly, that the

bullwhip is (extremely) costly to firms. By generating a mismatch between demand and

production, the bullwhip could be instrumental in lowering firm efficiency, increasing costs

and reducing profits. And yet, large sample firm-level evidence regarding the financial impact

of the bullwhip is relatively sparse. In fact, the academic literature on the bullwhip focuses

almost exclusively on modeling and determining empirically the underlying factors that drive

the bullwhip and on managing the bullwhip. But if the bullwhip has no economic consequences,

what is there to manage?

The purpose of this paper is to investigate whether the bullwhip has economic

consequences at the firm level using large scale panel data. Investigating the bullwhip effect at

the firm level rather than the industry or industry sector levels is important because aggregation

mechanically suppresses the bullwhip effect (Chen and Lee, 2016). Our analysis has modest

aims insofar as it focuses on intra-firm bullwhips rather than a more comprehensive analysis of

the bullwhip along firms’ supply chains (inter-firm bullwhips). Mostly because of data

requirements, other large sample firm-level studies have similarly limited themselves to

analyzing intra-firm bullwhips (Bray and Mendelson 2012; Shan et al. 2014). Specifically, we

investigate the relation between the bullwhip and a large number of firm-level

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accounting/financial performance measures both in terms of first-moment mean effects and

second-moment volatility effects.

To investigate how the bullwhip might affect expected firm performance and the

variance of firm performance, we present formal, if intuitive-based hypotheses regarding the

impact of the bullwhip on firm-level profitability outcomes. (These hypotheses can also be

derived from a stylized monopolistic single server queueing inventory model provided in the

online Appendix A.1).

Our empirical results are quite surprising. Contrary to what has been assumed

implicitly by many operations management scholars, our analysis yields results that are

inconsistent with the notion that the bullwhip has far-reaching economic consequences for the

firm. In particular, we find relatively few statistically significant times-series cross-sectional

relations between measures of the bullwhip and our comprehensive set of accounting/financial

performance measures, both with and without covariate controls. Even in those cases where

the relations are statistically significant, the coefficient signs are either counterintuitive or the

coefficients are economically insignificant.

We do not consider our results to be definitive. After all, our analyses depend upon

proxies for essential variables such the bullwhip and capacity utilization which may fail to do

justice to the underlying concepts. There are also potential endogeneity issues which are always

difficult to contend with. Also, our analysis focuses solely on intra-firm bullwhips, and perhaps

the essential bullwhip effect involves inter-firm bullwhips along the supply chain. Nevertheless,

our empirical results are very surprising and call for further analyses of the relation between

the bullwhip effect and its economic outcomes at the firm level in order to vindicate the

intellectual investment that operations management scholars have invested over the years on

the bullwhip effect.

In what follows, Section 2 briefly reviews relevant literature. Section 3 derives the

hypotheses. Section 4 describes the empirical constructs and the data. Section 5 provides the

empirical tests assuming that the bullwhip is (conditionally) exogenous. Section 6 addresses

the potential endogeneity of the bullwhip. Section 7 provides sensitivity analyses. Section 8

briefly concludes.

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2. A Brief Literature Review
Only recently have accounting researchers taken interest in the bullwhip effect (Chang,

Chen, Hsu, Mashruwala 2018). By contrast, the bullwhip effect has been analyzed extensively

by economists and operations management scholars. Blinder and Maccini (1991a, b), Cachon

et al. (2007), Giard and Sali (2013), and Chen and Lee (2016) offer comprehensive surveys of

these respective literatures. Empirical studies of the bullwhip in both the economics and

operations management literatures focus almost exclusively on industry and higher levels of

aggregation. But, there are a few important exceptions. Bray and Mendelson (2012) devise a

firm-level measure of the bullwhip based on the seminal inventory model by Lee (described

briefly below) that allows for information sharing, which acts to mitigate the bullwhip effect

between the upstream and downstream departments/firms. At the expense of some

oversimplification, they essentially measure the bullwhip by the difference between the

volatility of demand and the volatility of production. Bray and Mendelson find that the bullwhip

effect is ubiquitous with about two-thirds of their firms exhibiting bullwhips, and argue that the

bullwhip is economically significant in the aggregate with the mean quarterly standard

deviation of upstream orders exceeding that of demand by $20 million. Shan et al. (2014)

investigate the bullwhip effect for over 1200 Chinese firms listed on the Shanghai and Shenzhen

stock exchanges from 2002 to 2009. They measure the bullwhip by the ratio of the volatility of

production to the volatility of demand. They find that more than two-thirds of their firms exhibit

a bullwhip effect. Although documenting the ubiquitous nature of the bullwhip and bullwhip

drivers, neither of these studies attempt to measure the financial impact of the bullwhip on firm-

level profitability.

To the best of our knowledge, Mackelprang and Malhotra (2015) is the only study to

date to attempt to measure the firm-level economic impact of the bullwhip by reference to

firms’ return on assets (ROA) and its components. They examine the bullwhip effect across

supply chain partners by analyzing 383 customer-supplier combinations. Unlike the studies

cited in the previous paragraph, they are able to measure the bullwhip effect both within the

firm and also across the supply chain. The primary limitation of their study is the small sample

size which is a consequence of their supply chain focus. (Indeed, their sample size seems to be

5
problematic as evidenced by the fact that all of the independent variables in their base model

are statistically insignificant.)

Mackelprang and Malhotra (2015) regress their performance measures on quadratic

functions of the intra and inter-firm bullwhips. They find that their intra-firm bullwhip linear

(quadratic) term is (i) statistically negatively (positively) associated with ROA, (ii) positively

(negatively) statistically associated with SGA expense and (iii) insignificantly associated with

operating margin. However, a closer look at their results indicates that even when the regression

coefficients are statistically significant they are not economically significant. Furthermore, the

sum of the linear and quadratic terms are economically insignificant for all three performance

measures. Moreover, based on their reported regressions, at the variable means, an increase in

the intra-firm bullwhip is counterintuitively positively associated with an increase in ROA and

negatively associated with selling, general and administrative expenses (SG&A).

In addition to their small sample focus, Mackelprang and Malhotra (2015) analysis is

limited to a small number of accounting metrics. By contrast, we investigate the relation of the

bullwhip to the means and volatilities of a large number of accounting and equity market based

firm-level performance measures. We focus on volatility effects as well as mean effects because

(i) the bullwhip itself is a volatility-type measure and (ii) volatility effects are often more

exactly estimated (that is, with less noise) than mean effects (Merton 1980). We also investigate

market-based performance measures because volatility measures are known to effect equity

return performance. We also attempt to address the potential endogeneity of the bullwhip.

3. Hypotheses
The extant operations management literature focuses primarily on the existence of the

bullwhip effect and it’s the underlying drivers, and how to manage/eliminate the bullwhip. Even

where the operations management literature ascribes cost frictions and cost inefficiencies to the

bullwhip, the focus is primarily on how cost shocks help to drive the bullwhip rather than

impact of the bullwhip per se on costs (e.g., Cachon et al. 2007).

There are indeed two ways to view the bullwhip effect at the firm level and the relation

between this effect and firm profitability. One view is suggested by the empirical findings in

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the literature that the bullwhip is heterogeneous across industries and industry sectors. This

heterogeneity raises the possibility that rather than being a costly friction, the extent of the

bullwhip effect at the firm level is potentially an outcome of each firm’s underlying exogenous

characteristics and the firm’s profitability optimization. Once these firm-level exogenous

determinants of the bullwhip are accounted for, there may in fact be no relation between the

bullwhip and profitability. (This view is equivalent to the notion that the bullwhip effect is

endogenous to firm characteristics, which we test further below.) To illustrate, for some firms

the bullwhip will arise optimally as a response to industry demand seasonality and/or fixed

ordering costs. For other firms, the bullwhip effect will be minimal or even non-existent

because, given their demand and cost structures, production smoothing is the optimal profit

maximizing response. This view of the bullwhip effect at the firm level seems to underlie most

of the operations management literature if only implicitly. Indeed, in their comprehensive

review of the bullwhip effect, Chen and Lee (2016) show how long-run minimization of the

average cost of the base stock yields different drivers for the bullwhip effect depending upon

the underlying demand dynamics. These models imply that rather than being costly to the firm,

the bullwhip effect is just a natural outcome of firms’ optimal inventory decisions. However,

these models raise the conundrum that if the bullwhip at the firm level is simply an outcome of

an efficient optimization process, why should we care about the bullwhip effect to begin with.

Even the notion of managing the bullwhip is murky in the context of these models. For example,

Chen and Lee (2016) show inter alia that if demand follows an IMA(0,1,1) process, the

bullwhip is solely an increasing function of lead times, implying presumably that the firm

should attempt to reduce leads times in order to minimize the bullwhip effect. However, if

inventory, including lead times are chosen optimally given firms’ exogenous characteristics,

then any bullwhip that arises at the firm level because of lead times is a neutral outcome and

irrelevant from the firms’ profit optimization (cost minimization) point view.

An alternative view is that firms are not always efficient optimizers and that the

bullwhip at the firm level is a costly friction that firms are often unable to eliminate. In their

seminal paper, Lee et al. (1997a) maintain that the bullwhip “leads to tremendous

inefficiencies: excessive inventory investment, poor customer services, lost revenues,

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misguided capacity plans, ineffective transportation, and missed production schedules.”

Indeed, they offer a number of strategies for managing/counteracting the bullwhip effect

including avoiding multiple demand forecast updates, break order batching, stabilizing prices,

and eliminating gaming in shortage situations. They goes as far as to conclude “the choice of

companies is clear: either let the bullwhip effect paralyze you or find a way to conquer it.” In a

similar vein, Metters (1997) argues that the bullwhip is costly because bullwhip-induced

volatility causes limited capacity firms to oscillate between understocking and overstocking.

The former leads to lost sales and capacity adjustment costs whereas the latter leads to excessive

inventory holding costs and inventory obsolescence costs. Based on simulations, Metters

(1997) finds the bullwhip reduces firm profits from anywhere between 5% and 30%. More

alarmingly, in the famous beer distribution game (e.g., Sterman 1995), the bullwhip effect often

yields 5-10 times higher costs than those of the optimal policy.

The hypotheses below are based on the maintained assumption that the bullwhip at the

firm level is in fact a costly friction that arises when firms fail to act optimally (efficiently)

given their underlying exogenous characteristics. (These hypotheses are also supported by a

stylized queueing model of the firm described in the online Appendix A.1.) As in Lee et al.

(1997a), we suggest that the bullwhip is costly because it generates a mismatch between

demand and production, thereby inducing excess volatility into the production process. The

bullwhip-induced volatility, in turn, causes limited capacity firms to oscillate between

understocking and overstocking, increasing firms’ costs and reducing their profitability. These

considerations yield the following base hypothesis expressed in the alternative:

H1: The bullwhip is inversely related to the firm’s expected profits.

The bullwhip induces volatility in the firms operations. More volatile firm operations

should make the firms’ costs and profits more volatile as well, yielding the following hypothesis

expressed in the alternative:

H2: The bullwhip is positively related to the volatility of the firm’s profits.

The first two hypotheses describe the impact of the bullwhip on the average firms’

expected profitability and on profit volatility. However, it is possible that even if the bullwhip

has little effect on the average firm, it may affect specific firms for which the bullwhip effect

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is more salient. The next two hypotheses focus on those firms and industries for which the

bullwhip is more likely to have an effect on profitability. Specifically, the literature shows that

firms manage variability in operations using a combination of safety stock and safety capacity.

To the extent that the bullwhip adds additional volatility in firms’ operations, higher and costly

safety stock will be required the smaller is firms’ safety capacity (Hu, Duenyas, and

Kapuscinski, 2003 and Graves and Schoenmeyr, 2016). These considerations yield the

following hypothesis:

H3: The greater the firm’s capacity utilization, the more negative is the relation between

the bullwhip and expected profits.

A firm that faces a costly bullwhip effect will likely try to increase profits by passing

bullwhip expenses onto customers (or equivalently expend resources to reduce the bullwhip

and pass that latter cost onto customers). If the firm can indeed pass the bullwhip costs onto

customers then there should be no relation between the bullwhip and firm profitability.

However, the ability to pass costs onto customers is a function of the competitive nature of the

industry output market. In a competitive output market with infinitely elastic demand, firm are

unable to raise output prices, so that they cannot pass costly bullwhip effects onto their

customers. By contrast, in oligopolistic or monopolistic industries, firms can raise prices to

customers to offset the bullwhip and no relation between the bullwhip and profitability need

obtain. Thus, firm profitability should show a stronger negative relation to the bullwhip the

more competitive the industry in which the firm operates, leading to the following hypothesis:

H4: The more competitive the industry in which the firm operates, the more negative is

the relation between the bullwhip and expected profits.

4. Sample Data and Univariate Statistics

4.1 Profitability Metrics

We define profitability empirically both in terms of accounting-based metrics and a

market-based metrics. The accounting-based metrics include ROA, Return on Equity (ROE)

and Cash Flows from Operations normalized by Total Assets (CFO). The market-based metrics

are the Return on Market Value Equity (ROME) and firm’s market value as measured by

9
Tobin’s Q, that is, the Market-to-Book ratio. (Tobin’s Q is a normalized measure of capitalized

earnings.) In addition to the volatilities of ROA and ROME, the volatility of profits is also

measured by equity return volatility, which measures the sensitivity of equity returns to total

risk - that is systematic and unsystematic risk.

4.2 Bullwhip Metrics

We estimate the bullwhip in two different ways following the literature. First, we

estimate a firm-level ratio based bullwhip measure, denoted SYYZ, following the methodology

of Shan, Yang, Yang and Zhang (2014). They compute the bullwhip as the ratio of the standard

deviation of de-trended production to the standard deviation of de-trended demand. De-trending

helps to control for non-stationarity. Specifically, we calculate the de-trended production and

demand series by taking the first difference in the natural log of each variable. We then compute

the standard deviation of the de-trended variable for period t using the first quarter for which

the data are available through the end of period t. Cost of goods sold (COGS) proxies for

product demand, and demand plus the change in inventory proxies for production. If COGS is

missing then it is imputed using the gross profit margin in the previous period and reported

sales for the current period. To maintain consistency across observations, LIFO observations

are transformed to FIFO by adding the LIFO reserve (LIFOR) to quarterly inventory and

subtracting the change in LIFO reserve from reported quarterly COGS. The LIFO reserve

appears in the annual Compustat data. We compute the quarterly change in the reserve by

dividing the annual change by 4. To mitigate outliers, we require quarterly COGS, revenues,

inventory, and total assets greater than a million dollars each.

Second, we estimate a firm-level additive based bullwhip measure, denoted BM,

following Bray and Mendelson (2012). Their model pertains to a single firm that observes

demand described by a martingale model of forecast evolution (MMFE) and replenishes

inventory with a generalized order-up-to policy (GOUTP). (See Hausman (1969) and Hausman

and Peterson (1972) on the MMFE demand process. Chen and Lee (2009) argue for such order

policies, citing their parsimony and common usage.) In this model, demand uncertainty resolves

gradually through a series of “lead k” demand signals, i.e., signals with k period transmission

10
lead times, k=0, 1, 2, ..., ∞. Lead k signals correspond to demands between k and k + 1 quarters-

hence. The lead ∞ signal corresponds to quarterly seasonal means.

Based on the MMFE, Bray and Mendelson (2012) decompose the bullwhip into a series

of lead k bullwhips (βk), that is, the variance amplifications of lead k demand signals.

Importantly, these bullwhip measures distinguish between demand variability and its

uncertainty, which is further decomposed by information availability

(Chen and Lee 2009). Following Bray and Mendelson, we measure the overall bullwhip as the

sum of the lead k bullwhips.

The distribution of firm-level bullwhips (that is, for each lead time) is estimated using

quarterly Compustat data between 1974 and 2016 for U.S. firms in the retailing, wholesaling,

manufacturing, and resource extracting sectors (SIC 5200-5999, 5000-5199, 2000-3999, and

1000-14000, respectively). As in the case of SYYZ, COGS proxies for product demand, and

production (i.e. demand plus the change in inventory) proxies for orders.

We estimate the BM bullwhip by firm-quarter utilizing data from the beginning firm

sample period through quarter end, requiring a time-series of uninterrupted data of at least 24

firm-quarter observations. Each firm’s demand and orders are scaled by total assets. In addition,

for each firm-quarter sample, demand and orders are further transformed by (a) de-trending the

scaled demand and orders with linear and quadratic functions of time, and (b) normalizing the

demand variances to one. We also divide orders by the standard deviation of demand. As a

consequence, the bullwhip is expressed as a percentage of the demand variance. Untabulated

results indicate that our bullwhip estimates are similar to those of Bray and Mendelson (2012).

Differences are attributed primarily to different sample periods. (Note that all untabulated

results in this paper are available from the authors.)

Although computed differently, we observe that the highest BM and SYYZ bullwhips

are in the wholesale and manufacturing sectors. The correlation between the BM and SYYZ is

0.16 and significant at less than 1%. Although both measures are positively correlated, they

are likely measuring different aspects of the bullwhip affect.

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4.3 Accounting and Market Data

We collect annual accounting data from Compustat for the period 1980 to 2016 and

monthly equity returns from CRSP. (Note that the BM and SYYZ bullwhip estimations require

time series data. Consistent with Bray and Mendelson (2012), we require a minimum of 24

quarters of data, and hence, the first year available data for the regression analyses is 1980.) To

align the bullwhip estimates which are estimated at the firm-quarter level with the annual

accounting and market data, we use the bullwhip estimates measured as of the fourth fiscal

quarter throughout the analysis.

The initial sample (i.e., including firms from the extracting, manufacturing, retail, and

wholesale sectors) consists of 113,804 firm-years. To be included in the final sample we require

positive book value of equity and non-missing value of each of the following variables: BM,

SYYZ, ROA, ROE, CFO, ROME, and volatility of each of ROA, ROE, CFO, and equity

returns. These restrictions reduce the sample to 41,358 (4,106) firm-year (firms). The appendix

in this text describes how we measure each of the variables used in the various empirical

analyses.

Table 1 provides descriptive statistics for the main variables in our study. The mean

and median estimated BM bullwhips are positive. The sample firms are profitable on average,

with COGS as the major expense. We observe mean (median) equity returns of 15.6% (8.3%).

Mean market value of equity is close to 300 million dollars.

5. Regression Results: Exogenous Bullwhip

5.1 Testing Hypothesis 1

The regression analyses in this section assume that the bullwhip is (conditionally)

exogenous. In Section 6 below, we account for the potential endogeneity of the bullwhip. The

qualitative results as we shall see are insensitive to this distinction.

Table 2 regresses the accounting and market measures of profitability on the bullwhip

both without and with covariate controls. All regressions results are estimated using pooled

OLS with firm and year fixed effects. (We also estimate the models with year and industry

fixed effects and obtain similar results). Standard errors are clustered at the firm level. The

12
results are insensitive to alternative clustering methods whether at the industry, firm-year or

industry-year levels.

The control variables include those factors that have been shown by the accounting and

finance literatures to affect accounting and economic profitability--see reviews by Lev (1989),

Kothari (2001) and Richardson et al. (2010). More specifically, the control variables for the

accounting profitability measures include: Leverage - a proxy for the firm’s capital structure,

interest payments and the potential for agency (bondholder-stockholder) conflicts. We expect

profitability to be negatively related to firm leverage. The Log of Total Assets is a proxy for

firm size and maturity. We expect that larger more mature firms will be more profitable. Growth

in Sales and the Market to Book ratio proxy for firm growth. (As a dependent variable, the

Market-to-Book ratio is interpreted in the literature as a market measure of firm value, Tobin’s

Q. As a regressor, the Market to Book ratio is interpreted as a measure of firm growth.) We

expect growth firms to be more profitable. We also control for firm risk as proxied by demand

persistency and sales volatility. Profitability should increase (decrease) in demand persistency

(sales volatility). The control variables for the market-based profitability (ROME) regressions

include size (measured as the log of market value of equity), the book-to-market ratio, and the

value weighted aggregate market return. Covariate control variables are measured

contemporaneously. We report results using lagged controls in the sensitivity analyses section

below.

Table 2, Panel A regresses ROA on various measures of the bullwhip. Columns (1) and

(2) regress ROA on the Bray-Mendelson (2012) bullwhip without and with covariate controls,

respectively. Numbers in parentheses are standard errors. The estimated coefficients are

statistically significant but positive, contrary to intuition and H1. Columns (3) and (4) regress

ROA on the Shan et al. (2014) bullwhip measure without and with covariate controls,

respectively. The estimated coefficients are statistically insignificant. By contrast, the control

variables are statistically significant for the most part in Columns (2) and (4) and take on signs

consistent with the literature. In particular, ROA is negatively related to leverage and positively

related to firm size and growth, where growth is measured both by growth in sales and the

market-to-book ratio. (We use the inverse book to market ratio in the regressions to reduce

13
potential problems engendered by small book value numbers. In our discussions, we always

refer to the Market-to-Book ratio although the regressions show the inverse ratio.) The

coefficients on sales persistency and variability are not significant. Overall, these results reject

H1 for both the Shan et al. and Bray-Mendelson bullwhip metrics.

Columns (5) and (6) regress ROA on the decile-based rank of the Bray-Mendelson and

the Shan et al. bullwhip measures (Rank_BM and Rank_SYYZ, respectively) with covariate

controls, respectively. Results without covariate controls are similar (untabulated). Taking

ranks of the bullwhip measures helps to mitigate measurement error in the bullwhip.

Measurement error is less likely to affect the rank of a variable than its value unless of course

the measurement error is sufficiently large to affect the ranking as well. In addition, ranking

helps to address the fact that the BM metric is oftentimes negative and theory provides little

guidance regarding a negative bullwhip value. (The SYYZ measure is positive by construction.)

Again, the estimated coefficient for the rank of BM is statistically significant but positive and

the estimated coefficient for the rank of SYYZ is statistically insignificant. Columns (7) and

(8) regress ROA on positive values of the BM metric without and with covariate controls,

respectively. This is the only bullwhip metric for which the estimated coefficients are negative

and statistically significant. Nevertheless, these results are not economically significant.

Specifically, standardized regressions (untabulated) show that the positive bullwhip coefficient

is the least economically significant of all regressors with the exception of the persistence

coefficient. A one standard deviation changes in the positive bullwhip changes ROA by only a

0.015 standard deviation. By comparison a one standard deviation in Leverage, size, and growth

in sales changes ROA by 0.078, 0.097, and 0.26 standard deviations, respectively.

Alternatively, a change of one standard deviation of the positive BM bullwhip changes ROA

by about 0.3 percentage points whereas a one standard deviation in leverage in contrast changes

ROA by 2.9 percentage points.

Replicating Panel A using Book Return on Equity or normalized Operating Cash flows

as measures of profitability yield results that are qualitatively indistinguishable from those of

ROA. (See the online Appendix A.2, Table 1_OA.)

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 Table 2, Panel B regresses the return on market equity (ROME) on various measures

of the bullwhip. Columns (1) and (2) regress ROME on the BM measure without and with

covariate controls, respectively. The coefficient on the BM measure is negative as conjectured

and statistically significant at the 10% level in the regression with covariate controls. However,

the coefficient is not economically significant; a one standard deviation increase in the bullwhip

reduces ROME by only a 0.007 standard deviation. By comparison, one standard deviation in

the book-to-market ratio yields a 0.25 standard deviation change in ROME. Columns (3) and

(4) regress ROME on the SYYZ measure without and with covariate controls, respectively. The

estimated coefficients are statistically insignificant.

Columns (5) and (6) regress ROME on the rank of the BM and SYYZ measures with

covariate controls, respectively. The coefficient on the rank of BM is negative and statistically

significant at the 1% level with covariate controls, and statistically insignificant absent

covariate controls (untabulated). However, the economic effect of a change in the rank of BM

is small, similar to BM. The estimated coefficients for the rank of SYYZ are statistically

insignificant with and without (untabulated) controls. Columns (7) and (8) regress ROME on

positive values of the BM metric without and with covariate controls, respectively. The

estimated bullwhip coefficients are negative and statistically significant without covariate

controls but statistically insignificant with controls.

Table 2, Panel C regresses firm market value, defined as Tobin’s Q or equivalently the

Market to Book ratio, on various measures of the bullwhip. Columns (1) and (2) regress Tobin’s

Q on the BM without and with covariate controls, respectively. The estimated coefficient on

the BM is negative and statistically significant without controls and statistically insignificant

with controls. The coefficients are not economically significant. Column (5) shows that the

rank of BM with controls is negative and statistically significant. But not economically

significant. The coefficients for all other bullwhip metrics are insignificant.

Table 2, Panel D shows the results of the ROA and ROME regressions when we

decompose the BM bullwhip to lead 0 and the remainder. The coefficient on the lead 0 bullwhip

is negative and statistically significant in the ROA regression with controls and statistically

insignificant without controls. However, the coefficient on the remainder bullwhip is positive

15
and significant in the ROA regression with and without controls and negative in the ROME

regression with controls. Notwithstanding the statistical significance, the economic

significance in all cases is quite low.

Overall, Table 2 indicates that the bullwhip and expected firm profitability are not

negatively significantly related, contrary to H1.

To further explore the relation between the bullwhip and profitability we examine

potential channels through which the bullwhip might affect profitability. First, we exploit the

well-known Dupont formula in which ROA is the product of Asset Turnover (AT) and the

Profit Margin (PM). Because it is hard to know how the bullwhip should affect AT, we focus

the analysis on the profit margin. If the bullwhip is costly, it should reduce firms’ PM. Second,

we examine if firms’ expenses, namely Cost of Goods Sold (COGS) and Selling General and

Administrative (SGA) expenses, are affected by the bullwhip. If the bullwhip has costly

consequences, and given the mechanics of financial reporting, at least one of COGS or SGA

should be positively related to the bullwhip.

Table 3, Panel A regresses the profit margin on various bullwhip measures without and

with covariate controls. Overall, the results for PM are very similar to those for ROA both

without and with covariate controls. Specifically, columns (1) through (6) show that the

coefficient on the BM, SYYZ, and their respective rank, are either positive and statistically

significant, contrary to intuition, or statistically insignificant. Only the positive BM measure

coefficients in columns (7) and (8) are negatively statistically significant but again not

economically significant. A change of one standard deviation in the bullwhip is associated with

a 0.026 standard deviation change in PM. In comparison, the respective statistics for the

leverage, size, and sales growth rate are 0.17, 0.07, and 0.27. (Untabulated results indicate that

the BM, positive BM, and rank of BM measures are positively related to AT. The rank of SYYZ

is negatively associated with AT but SYYZ is not associated with AT.)

Table 3, Panel B regresses COGS on various bullwhip measures with and without

covariate controls. With the exception of the positive BM measure, all bullwhip measure

coefficients are either statistically significantly negative, contrary to intuition, or statistically

insignificant. The positive BM metric coefficients are positive and statistically significant but

16
not economically significant. A change of one standard deviation in the positive bullwhip is

associated with a 0.042 standard deviation change in COGS. In comparison, the respective

statistics for the leverage, size, and sales growth rate are 0.07, 0.12, and 0.11.

Table 3, Panel C regresses SG&A (scaled by total sales) on various bullwhip measures

with and without covariate controls. All bullwhip measure coefficients are either statistically

significantly negative, contrary to intuition, or insignificant.

In an untabulated analysis we regress PM, COGS and SG&A on the BM measure after

decomposing the bullwhip measure into the lead zero bullwhip and the remainder. The lead

zero bullwhip coefficients are uniformly insignificant. The bullwhip remainder coefficients are

generally statistically significant but all signs are counterintuitive. Overall Table 3 indicates

that the bullwhip is not significantly negatively related to firms’ profit margins and not

significantly positively related to firms’ costs.

5.2 Testing Hypothesis 2

To test Hypothesis 2 relating the volatility of profitability to the bullwhip, Table 4,

Panel A regresses the volatility of ROA on various bullwhip measures both with and without

controls. The control variables include size, growth in sales, book-to-market and sales

volatility. We also control for the Loss Ratio and the Mean Operating Cycle because these have

been shown to affect the volatility of profitability in the accounting and finance literatures. The

greater the leverage, growth, proclivity for losses, and sales revenue volatility, the more likely

is profitability to be volatile. The larger the firm and the greater it’s operating cycle, the less

volatile is profitability likely to be. The results in Panel A indicate that the BM bullwhip is

negatively related to the volatility of ROA contrary to H2. All other bullwhip measures are not

statistically significant.

Replicating Panel A using the volatility of the Book Return on Equity or the volatility

of normalized Operating Cash flows yield results that are qualitatively indistinguishable from

those of the volatility of ROA. (See the online Appendix A.2, Table 2_OA.)

Table 4, Panel B regresses the volatility of ROME on various bullwhip measures both

with and without controls. The coefficients on the BM measures are positive and statistically

17
significant, but the economic significance is low. For example, a change of one standard

deviation in BM is associated with a 0.016 standard deviation change in the volatility of ROME.

In comparison, the respective statistics for the log market value of equity, book-to-market, and

ROA volatility are 0.13, 0.09, and 0.08. Overall the results in Table 4 suggest that the bullwhip

is unrelated to the volatility of accounting profitability, but is (weakly) associated with the

volatility of market profitability.

5.3 Testing Hypotheses 3 and 4

H3 conjectures that the impact of the bullwhip on profitability should be more negative

the greater the firm’s capacity utilization. To test this hypothesis, we divide our sample into

terciles of firm-level capacity utilization. Capacity utilization is defined as (the three-digit SIC

median adjusted) Sales divided by Property, Plant and Equipment. Table 5, Panel A shows the

regressions of ROA on the BM bullwhip for each tercile separately, inclusive of covariate

controls (untabulated). The bullwhip regression coefficients are significantly positive for all

three capacity utilization terciles, inconsistent with H3. Table 3, Panel B presents the

regressions of ROME on the bullwhip for each tercile. Here, we find that the bullwhip

coefficients are negative and significant for the bottom two terciles. However, the coefficients

increase monotonically the higher the tercile, contrary to H3. Moreover, differences in the

coefficients across terciles are not statistically significant. Furthermore, regressing PM (Panel

C), COGS (Panel D) and SGA (Panel E) on the bullwhip across capacity utilization terciles

yields statistically significant but counterintuitive results.

To test H4, we divide our sample into terciles formed on the basis of an industry

Herfindahl (sales) index. Firms in the bottom tercile are in the least competitive industries

(highest index) whereas firms in the highest tercile are in the most competitive industries. Table

5, Panel A regresses ROA on the BM bullwhip for each tercile, inclusive of covariate controls

(untabulated). The results shows that the bullwhip coefficients are uniformly positive and

significant across the terciles. Importantly, differences in the coefficients across terciles are not

significant. Results are similar when profitability is measured by ROME. Furthermore,

regressing PM (Panel C), COGS (Panel D) and SGA (PANEL E) on the bullwhip across

competitive position terciles yields mostly statistically significant but counterintuitive results.

18
 We replicate Table 5 for alternative bullwhip measures and obtain qualitatively similar

results. (See the online Appendix A.2, Table 3_OA and Table 4_OA.)

5.4 Overall Findings

Overall, the findings in Tables 2 through 5 suggest that the bullwhip has a little if any

impact on firm profitability. The SYYZ measure typically yields insignificant results whereas

the BM measure yields statistically significant but counterintuitive results. Ranking of the two

bullwhip measures yields similar results. Only the Positive BM measure sometimes yields

statistically significant results with the correct sign, but the findings are generally not

economically significant and are based on a much smaller sample. Separating the bullwhip by

lead time does not improve the findings. Overall, the findings are not consistent with any of the

hypotheses irrespective of the specific bullwhip measure.

6. Regression Results-Endogenous Bullwhip

6.1 Some Methodological Issues

The analyses of the prior subsection assumed that the bullwhip is exogenous or at least

conditionally exogenous. However, error in measuring the bullwhip, correlated omitted

variables and simultaneity could result in endogeneity. Simultaneity is of special concern

because the bullwhip and profitability are both functions of managerial actions that could be

driven by the same underlying characteristics of the firm. Furthermore, more profitable firms

may have the resources to reduce the bullwhip effect raising the issue of reverse causality.

Finally, as we pointed out above, the bullwhip could arise endogenously as a response to firms’

optimizing behaviors given each firm’s exogenous characteristics.

Because no obvious Instrumental Variable (IV) for the bullwhip is evident, and absent

a natural experiment, we elect to deal with potential endogeneity of the BW using a matched

design analysis based on the Covariate Balancing Propensity Score (CBPS) approach recently

developed by Imai and Ratkovic (2014). The CBPS approach models treatment assignment

while simultaneously optimizing covariate balance. To the extent that one obtains covariate

balance across the treatment and control samples, the estimated treatment effect (of the

bullwhip on profitability) will be relatively insensitive to misspecifications in the parametric

19
model relating the bullwhip to profitability (Ho, Imai, King and Stuart, 2007). Research in the

econometrics literature indicates that CBPS estimation is effective relative to other methods in

mitigating potential misspecifications from estimating parametric propensity score models

(Fong et al. 2015).

We match the treatment and control firms based on the estimated CBPS propensity

scores. The matching analysis is executed as follows: We first restrict the sample to

manufacturing industries because the number of observations in the other sectors is fairly low

given that we conduct the matching procedure on a yearly basis. To increase the power of the

test, we match high bullwhip firms with low bullwhip firms. Specifically, for each fiscal year,

we rank the sample firms into terciles based on the specific bullwhip measure, and match firms

from the top tercile (treatment sample, high bullwhip) with firms in the bottom tercile (control

sample, low bullwhip). We facilitate the matching by estimating the CBPS propensity scores

using accounting profitability determinants and the empirical drivers of the bullwhip from Shan

et al. (2014). The profitability determinants include leverage, sales growth, log of total assets

(a measure of size), demand persistency and sales volatility. (Because the book-to-market ratio

and the profit margins are dependent variables, we do not include them in the matching

procedure.) The bullwhip drivers include the Shan et al. (2014) seasonality ratio, inventory

days, and days accounts payable. We also include capacity utilization. We select the match

from the control sample based on the closest propensity score with replacement. We repeat the

process for the BM, SYYZ and Positive BM bullwhip measures, so we have a separate matched

sample for each bullwhip measure.

6.2 Empirical Results

Table 6, Panel A presents the mean of the coefficients from the first stage regressions

of the three bullwhip metrics. Significance is based on Newey-West standard errors. The results

indicate that all three bullwhip metrics are positively and significantly correlated with demand

persistency, and negatively associated with inventory days and accounts payable days. The BM

and SYYZ metrics are positively and significantly related to sales volatility. Some of the other

covariates are also significant for one or the other of the bullwhip measures.

20
 Panel B presents mean covariate values across high and low bullwhip measures. In

general, we expect the differences between the treatment and control samples for each covariate

to be insignificant if covariate balance obtains. By and large we observe that the differences in

the determinants across the bullwhip measures are not statistically significant. Only 3

differences out of 27 are significant (at the 10% level), but the economic difference is low

around 2%. Results are quite similar when we examine differences in the medians. Following

the recommendation of Ho et al. (2007), we further examine the extent of covariate balance by

examining quantile-quantile plots provided in Figure 1 for each covariate across the BM and

SYYZ matched samples. These plots compare the distributions of the treatment and control

samples, not just means or medians. The plots provide strong qualitative evidence that the

CBPS approach is quite effective in yielding covariate balance.

Panel C shows the matched sample estimation of the impact of the bullwhip on

profitability for the three bullwhip metrics, inclusive of all first stage covariates. Results are

qualitatively similar without covariate controls (untabulated) as is to be expected if covariate

balance is truly attained (Ho et al., 2007). The findings in Panel C are very similar to prior

results in Section 5 for exogenous bullwhip metrics. Regarding the BM and SYYZ bullwhips,

the estimated coefficients are either statistically insignificant or statistically significant but in

the counter-intuitive direction (e.g., a positive impact of the bullwhip on profitability). The

positive BM metric yields results that are statistically significant and in the intuitive direction

for ROA, PM and COGS. Nevertheless, these estimates are again not economically significant.

The estimated coefficients for the remaining profitability metrics are either insignificant or

counterintuitive.

7. Sensitivity Analyses

We conduct several overall sensitivity analyses that further examine the robustness of

our results regarding the relation between the bullwhip and profitability:

1. Instead of propensity scores estimated based on the Covariate Balancing Propensity

Scores approach of Imai and Ratkovic (2014), we also estimate propensity scores based on the

conventional approach (untabulated) and the entropy balancing approach of Hainmueller

(2012). (See the online Appendix Table 5_OA.) The results are quite similar.

21
2. We re-estimate the regressions in section 5 using Quantile Regressions for the 25%,

50% and 75% quantiles. (See the online Appendix Table 5_OA.). We also re-estimate using

rank regressions (untabulated) and Fama-MacBeth (1973) regressions (untabulated). In the

latter case, the regression coefficients are estimated cross-sectionally using annual data,

parameters estimates are the means of the cross-sectional coefficient estimates, and standard

errors are computed from the annual cross-sectional coefficient estimates. The results for each

approach are similar to those already reported.

3. Estimating the regression using the full sample does not allow for variation in the

economic importance of the bullwhip across industries, thereby potentially masking this

importance in certain industries. We, thus estimate the regressions (untabulated) by industry

(3-digit SIC code) using our bullwhip proxies. The results are consistent with those reported.

Specifically, the profitability coefficients on the bullwhip are either not statistically significant

or positive and significant for 85%-90% of the industries. For those few industries where the

coefficients are negative and statistically significant, the magnitudes indicate low economic

significance.

4. Another potential explanation for the inconsequential impact of the bullwhip effect is

that firms have learned to control the bullwhip and reduce its effect over time (see Bray and

Mendelson 2012 for empirical evidence). Indeed, untabulated results indicate that the

autocorrelation in the bullwhip at the firm level is negative and significant, indicating that firms

reduce the bullwhip effect over time. To examine whether our results are affected by the time

trend in the bullwhip we estimate the regressions by decade. The results for SYYZ and BM are

entirely consistent with results reported in the tables – the coefficient on the bullwhip is not

statistically significant in any of the decades. The results related to the positive BM are

consistent with the conjecture – we find that the coefficient on the positive BM is negative and

significant in the 80s and 90s and not significant post 2000. However, even in the 80s and 90s

the economic significance of the bullwhip is low.

5. We re-estimate all regressions using lagged instead of contemporaneous covariates

(untabulated). None of the inferences change.

22
6. We repeated the matching analysis by matching firms based on year and 2-digit SIC

codes. To facilitate the matching we require a minimum of 60 observations in each year and 2-

digits SIC clusters. This requirement results in a significantly smaller sample – about 6700 obs.

Nevertheless, the results are virtually identical to those reported. The bullwhip variable is either

not significant or significant but with the opposite sign.

8. Conclusion
The empirical findings of this paper are not consistent with the conjecture that the

bullwhip has significant economic consequences at the firm level. Measuring the bullwhip at

the firm level based on Shan et al. (2014) and on Bray and Mendelson (2012), our cross-

sectional time series analyses on a large panel of firm-level data find that the relation between

the bullwhip and firms’ financial outcomes are often not statistically significant, or if

statistically significant, the coefficients are either counterintuitive in sign, or not economically

significant especially by comparison to the other regressors. Whether these results arise because

the bullwhip at the firm level is really a marginal economic phenomenon or because extant

bullwhip metrics lack empirical validity is difficult to know.

An alternative explanation is that the bullwhip at the firm level is an outcome of firms’

optimizing activities given firms’ exogenous characteristics rather than being a costly friction.

But if so, there is little point in trying to manage the bullwhip at the firm level insofar as it is

an outcome of firms’ optimizing activities. It bears repeating that our analysis focuses solely

on intra-firm bullwhips and provides no empirical evidence regarding the economic

consequences of the bullwhip effect across supply chains. Clearly, given the potentially

contentious nature of our findings, future empirical research in this area is a desideratum.

23
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Appendix– Variable Definitions

Bullwhip Variables

Demand – COGS minus change in quarterly LIFO.

Production - LIFO adjusted COGS minus the change in LIFO adjusted inventory.

Gross Profit Margin – gross profit (Sales minus LIFO adjusted COGS) over Sales.

BM – Bray and Mendelson (2012) bullwhip measure

SYYZ – Shan et al. (2013) bullwhip measure

Accounting Variables

Return on Assets – Earnings before Extraordinary Items scaled by average Total Assets

Cost of Goods Sold to Sales – ratio of cost of goods sold to total sales

SG&A Expenses to Sales – ratio of selling, general, and administrative expenses to total

sales

ROA Volatility – standard deviation of ROA. It is computed based on firm level data from

the first year of data through year t.

Herfindahl Index – Ratio of sum of SALE of the largest 4 firms to total sales in the 3-digits

sic industry during the year

PP&E Capacity – ratio of total sales to gross Property, Plant, and Equipment minus the

median ratio in the 3 digits sic during the year.

Loss Ratio – proportion of loss (defined as negative Earnings) years

Operating Cycle – sum of inventory days (computed as 360 times the ratio of average

inventory to cost of goods sold) and accounts receivable days (computed as 360 times the

ratio of average accounts receivable to sales).

Leverage – Total debt scaled by average total assets

Growth in Sales – Percentage change in total revenues

Profit Margin – Income before Extraordinary Items scaled by total revenues

Sales Volatility – standard deviation of revenues. It is computed based on firm level data

from the first year of data through year t.

27
Demand Persistency – the coefficient from a regression of demand in year t on demand in

year t-1. The regressions are estimated at the firm-year level, using firm level data from the

first year of data through year t.

SeasonRatio – firm specific seasonality ratio computed as in Shan et al. (2014).

Inventory Days – ratio of 365 to Inventory Turnover, which is computed as COGS scaled by

Inventory.

Accounts Payable Days - ratio of 365 to Accounts Payable Turnover, which is computed as

COGS scaled by Accounts Payable.

Market Variables

Equity Beta – Beta from the market model

Equity Return Volatility – standard deviation of monthly equity returns. We require a

minimum of 12 observations.

Equity Return – annual return computed based on monthly observations

Book-to-Market -- Stockholders Equity scaled by Market Value of Equity at fiscal year-end

Log Market Value of Equity – computed based on market value of equity at fiscal year end.

28
Table 1: Descriptive Statistics
MEAN STD Q1 MEDIAN Q3
BM 0.167 1.592 -0.280 0.009 0.397
SYYZ 1.263 0.485 0.994 1.146 1.421
Log Market Value of Equity 5.669 2.304 3.952 5.631 7.278
Return on Assets (ROA) 0.036 0.103 0.009 0.050 0.089
Cost of Goods Sold to Sales 0.646 0.169 0.545 0.671 0.768
SG&A Expenses to Sales 0.246 0.159 0.129 0.215 0.325
ROA Volatility 0.815 0.807 0.362 0.596 0.967
Equity Return 0.069 0.061 0.030 0.049 0.085
Equity Beta 0.156 0.524 -0.163 0.083 0.356
Equity Return Volatility 1.101 0.747 0.625 1.033 1.479
Book-to-Market 0.126 0.062 0.084 0.111 0.153
Herfindahl Index 0.815 0.807 0.362 0.596 0.967
PP&E Capacity 0.675 0.207 0.515 0.682 0.844
Leverage 0.210 0.000 0.060 0.194 0.319
Log of Total Assets 5.900 0.209 4.374 5.793 7.362
Growth in Sales 0.081 -0.415 -0.023 0.064 0.159
Demand Persistency 0.634 -0.297 0.489 0.696 0.837
Sales Volatility 0.291 0.043 0.170 0.248 0.363
Loss Ratio 0.169 0.000 0.000 0.091 0.250
Mean Operating Cycle 151.411 13.793 100.003 140.874 191.453
SeasonRatio 0.212 0.004 0.062 0.138 0.299
Inventory Days 93.060 3.997 49.806 79.880 121.249
Accounts Payable Days 43.596 8.114 26.362 37.312 51.728
Table 1 presents descriptive statistics of main variables used in this study.

29
 Table 2: Profitability and the Bullwhip
Panel A: Return on Assets (ROA)
BM BM SYYZ SYYZ Rank_BM Rank_SYYZ Pos_BM Pos_BM
Constant 0.074*** 0.031*** 0.074*** 0.030*** 0.025*** 0.036*** 0.078*** 0.055***
(0.004) (0.009) (0.006) (0.010) (0.009) (0.009) (0.007) (0.011)
Bullwhip 0.003*** 0.003*** 0.001 0.001 0.001*** -0.001 -0.002*** -0.002***
(0.000) (0.000) (0.004) (0.003) (0.000) (0.001) (0.000) (0.000)
Leverage -0.184*** -0.184*** -0.184*** -0.184*** -0.173***
(0.006) (0.006) (0.006) (0.006) (0.007)
Log of Total Assets 0.020*** 0.020*** 0.020*** 0.020*** 0.015***
(0.002) (0.002) (0.002) (0.002) (0.002)
Growth in Sales 0.121*** 0.121*** 0.121*** 0.121*** 0.119***
(0.003) (0.003) (0.003) (0.003) (0.004)
Book-to-Market -0.028*** -0.028*** -0.027*** -0.028*** -0.027***
(0.001) (0.001) (0.001) (0.001) (0.002)
Demand Persistency -0.003 -0.003 -0.003 -0.003 0.001
(0.004) (0.004) (0.004) (0.004) (0.005)
Sales Volatility -0.007 -0.007 -0.007 -0.007 -0.014
(0.013) (0.013) (0.013) (0.013) (0.015)
Observations 41,358 41,358 41,358 41,358 41,358 41,358 21,715 21,715
R-squared 0.037 0.221 0.034 0.219 0.221 0.219 0.038 0.226

Panel B: Return on Market Equity (ROME)

BM BM SYYZ SYYZ Rank_BM Rank_SYYZ Pos_BM Pos_BM
Constant 0.345*** -0.244*** 0.338*** -0.271*** -0.232*** -0.255*** 0.343*** -0.228***
(0.030) (0.048) (0.034) (0.052) (0.048) (0.050) (0.041) (0.064)
Bullwhip -0.002 -0.003* 0.006 0.021 -0.002*** 0.002 -0.009*** -0.003
(0.002) (0.002) (0.013) (0.015) (0.001) (0.003) (0.003) (0.003)
Log Mar. Val. of Equ 0.116*** 0.115*** 0.116*** 0.115*** 0.106***
(0.006) (0.006) (0.006) (0.006) (0.009)
Book-to-Market -0.235*** -0.235*** -0.235*** -0.235*** -0.238***
(0.013) (0.013) (0.013) (0.013) (0.016)
Market Return 1.088*** 1.088*** 1.088*** 1.088*** 1.120***
(0.025) (0.025) (0.025) (0.025) (0.035)
Observations 41,358 41,358 41,358 41,358 41,358 41,358 21,715 21,715
R-squared 0.096 0.263 0.096 0.263 0.263 0.263 0.096 0.255

Panel C: Tobin’s Q (Market-to-book Ratio)

BM BM SYYZ SYYZ Rank_BM Rank_SYYZ Pos_BM Pos_BM
Constant 1.120*** 1.328*** 1.083*** 1.290*** 1.336*** 1.315*** 1.091*** 1.278***
(0.037) (0.036) (0.049) (0.047) (0.037) (0.042) (0.056) (0.053)
Bullwhip -0.004** -0.001 0.029 0.030 -0.002* 0.003 0.003 0.002
(0.002) (0.002) (0.026) (0.024) (0.001) (0.004) (0.003) (0.003)
Controls N Y N Y Y Y N Y
Observations 41,358 41,358 41,358 41,358 41,358 41,358 21,715 21,715
R-squared 0.074 0.136 0.074 0.136 0.136 0.136 0.072 0.136

Panel D: Profitability and Bray and Mendelson (2012) Beta Timing

ROA ROA ROME ROME
Constant 0.075*** 0.032*** 0.345*** -0.245***
(0.004) (0.009) (0.030) (0.048)
Bullwhip_0 -0.004 -0.010** 0.004 0.019
(0.005) (0.005) (0.029) (0.028)
Bullwhip_Rem 0.003*** 0.003*** -0.002 -0.004**
(0.000) (0.000) (0.002) (0.002)
Controls N Y N Y
Observations 41,358 41,358 41,358 41,358
R-squared 0.037 0.222 0.096 0.263

30
Table 2, Panels A and B present results for the regression of ROA and ROME on the bullwhip and control
variables, respectively. BM, SYYZ, Rank_BM, Rank_SYYZ, Pos_BM columns denote the Bullwhip variable
based on the Bray and Mendelson (2012), the Shan et al. (2014), rank of BM (based on deciles formed on the
basis of BM), rank of SYYZ (based on deciles formed on the basis of SYYZ), positive values of BM measures,
respectively. Panel C presents regression results of Tobin’s Q (book-to-market ratio) on the bullwhip measures.
Panel D shows the profitability regressions on the Bray and Mendelson (2012) bullwhip decomposition by
information lead time. Bullwhip_0 (Rem) stands for zero (remainder) lead time. The control variables in Panel
C include leverage, ROA, sales growth rate, and equity beta. The control variables in Panel D include the controls
in Panel A. All regressions are estimated using firm and year fixed-effects. Standard errors are clustered at the
firm level.

31
 Table 3: Margins and the Bullwhip
Panel A: Margin
BM BM SYYZ SYYZ Rank_BM Rank_SYYZ Pos_BM Pos_BM
Constant 0.044*** -0.026** 0.037*** -0.034*** -0.032*** -0.026** 0.051*** 0.003
(0.005) (0.011) (0.007) (0.012) (0.011) (0.011) (0.007) (0.013)
Bullwhip 0.003*** 0.003*** 0.006 0.007* 0.001*** 0.000 -0.002*** -0.002***
(0.000) (0.000) (0.004) (0.004) (0.000) (0.001) (0.001) (0.000)

Controls N Y N Y N Y N Y
Observations 41,358 41,358 41,358 41,358 41,358 41,358 21,715 21,715
R-squared 0.022 0.140 0.021 0.138 0.139 0.138 0.024 0.141

Panel B: Cost of Goods Sold (COGS)

BM BM SYYZ SYYZ Rank_BM Rank_SYYZ Pos_BM Pos_BM
Constant 0.665*** 0.729*** 0.674*** 0.739*** 0.732*** 0.733*** 0.657*** 0.715***
(0.005) (0.012) (0.008) (0.013) (0.012) (0.013) (0.006) (0.013)
Bullwhip -0.001*** -0.001*** -0.007 -0.008* -0.001*** -0.001 0.002*** 0.002***
(0.000) (0.000) (0.005) (0.005) (0.000) (0.001) (0.000) (0.000)

Controls N Y N Y N Y N Y
Observations 41,358 41,358 41,358 41,358 41,358 41,358 21,715 21,715
R-squared 0.012 0.064 0.011 0.064 0.064 0.064 0.015 0.060

Panel C: Selling, General, and Admin (SG&A)

BM BM SYYZ SYYZ Rank_BM Rank_SYYZ Pos_BM Pos_BM
Constant 0.223*** 0.282*** 0.224*** 0.283*** 0.283*** 0.279*** 0.226*** 0.276***
(0.003) (0.010) (0.006) (0.011) (0.010) (0.010) (0.005) (0.011)
Bullwhip -0.001*** -0.001*** -0.001 -0.001 -0.000*** 0.000 -0.000 -0.000
(0.000) (0.000) (0.004) (0.004) (0.000) (0.001) (0.000) (0.000)

Controls N Y N Y N Y N Y
Observations 41,358 41,358 41,358 41,358 41,358 41,358 21,715 21,715
R-squared 0.014 0.103 0.013 0.103 0.103 0.103 0.013 0.105

Panel D: Margins and Bray and Mendelson (2012) Beta Timing

PM PM COGS COGS SG&A SG&A
Constant 0.045*** -0.022** 0.665*** 0.724*** 0.223*** 0.286***
(0.005) (0.011) (0.005) (0.011) (0.003) (0.009)
Bullwhip_0 -0.001 -0.007 0.004 0.006 -0.003 -0.001
(0.006) (0.006) (0.005) (0.005) (0.005) (0.005)
Bullwhip_Inf 0.003*** 0.003*** -0.001*** -0.001*** -0.001*** -0.001***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Controls N Y N Y N Y
Observations 41,358 41,358 41,358 41,358 41,358 41,358
R-squared 0.022 0.140 0.012 0.064 0.014 0.102
Table 3, Panels A-C present regressions of the profit margin and each of the main operating expenses – Cost
of Goods Sold and Selling, General, and Administrative – on the bullwhip measures, respectively. Panel D
presents the regression results of the profit margin and the main operating expenses on the Bray and Mendelson
(2012) bullwhip decomposition by information lead time. The control variables are those used in Table 2,
Panel A. The regressions are estimated using firm and year fixed-effects. Standard errors are clustered at the
firm level.

32
 Table 4: Volatilities and the Bullwhip
Panel A: Volatility of ROA
BM BM SYYZ SYYZ Rank_BM Rank_SYYZ Pos_BM Pos_BM
Constant 0.053*** 0.051*** 0.052*** 0.050*** 0.051*** 0.050*** 0.053*** 0.049***
(0.001) (0.005) (0.002) (0.005) (0.005) (0.005) (0.001) (0.006)
Bullwhip -0.000*** -0.000*** 0.001 0.001 -0.000 0.000 0.000 -0.000
(0.000) (0.000) (0.001) (0.001) (0.000) (0.000) (0.000) (0.000)
Log of Total Assets -0.003*** -0.003*** -0.003*** -0.003*** -0.002***
(0.001) (0.001) (0.001) (0.001) (0.001)
Growth in Sales -0.002*** -0.002*** -0.002*** -0.002*** -0.002**
(0.001) (0.001) (0.001) (0.001) (0.001)
Book-to-Market -0.001*** -0.001*** -0.001*** -0.001*** -0.001***
(0.000) (0.000) (0.000) (0.000) (0.000)
Loss Ratio 0.116*** 0.116*** 0.116*** 0.116*** 0.111***
(0.006) (0.006) (0.006) (0.006) (0.007)
Sales Volatility 0.037*** 0.037*** 0.037*** 0.037*** 0.037***
(0.005) (0.005) (0.005) (0.005) (0.005)
Operating Cycle -0.000 -0.000 -0.000 -0.000 -0.000
(0.000) (0.000) (0.000) (0.000) (0.000)
Observations 41,358 41,358 41,358 41,358 41,358 41,358 21,715 21,715
R-squared 0.082 0.263 0.081 0.263 0.263 0.263 0.081 0.260

Panel B: Volatility of ROME

BM BM SYYZ SYYZ Rank_BM Rank_SYYZ Pos_BM Pos_BM
Constant 0.132*** 0.154*** 0.128*** 0.151*** 0.153*** 0.152*** 0.129*** 0.143***
(0.002) (0.005) (0.003) (0.006) (0.005) (0.005) (0.003) (0.007)
Bullwhip 0.000*** 0.001*** 0.003 0.002 0.000*** 0.000 0.001*** 0.001***
(0.000) (0.000) (0.002) (0.002) (0.000) (0.000) (0.000) (0.000)
Log Market Value -0.008*** -0.008*** -0.008*** -0.008*** -0.006***
(0.001) (0.001) (0.001) (0.001) (0.001)
Book-to-Market -0.009*** -0.009*** -0.009*** -0.009*** -0.008***
(0.001) (0.001) (0.001) (0.001) (0.001)
ROA Volatility 0.412*** 0.410*** 0.411*** 0.410*** 0.415***
(0.034) (0.034) (0.034) (0.034) (0.044)
Observations 41,358 41,358 41,358 41,358 41,358 41,358 21,715 21,715
R-squared 0.185 0.229 0.185 0.229 0.229 0.229 0.190 0.225
Table 4 presents regression results of the volatilities of the profitability measures on the bullwhip
measures. The regressions are estimated using firm and year fixed-effects. Standard errors are clustered
at the firm level.

33
 Table 5: Profitability & the Bullwhip Given Capacity Utilization & Competitive
Position
Panel A: Return on Assets (ROA)
Capacity Utilization Competitive Position
Low Medium High Low Medium High
Constant 0.026* 0.064*** 0.002 0.070*** 0.028 0.001
(0.015) (0.014) (0.017) (0.014) (0.018) (0.014)
Bullwhip 0.003*** 0.002*** 0.002*** 0.003*** 0.002*** 0.003***
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
Observations 13,723 13,723 13,722 13,787 13,792 13,779
R-squared 0.206 0.193 0.216 0.222 0.231 0.214

Panel B: Return on Market Equity (ROME)

Capacity Utilization Competitive Position
Low Medium High Low Medium High
Constant -0.201** -0.288*** -0.446*** -0.157* -0.293*** -0.371***
(0.099) (0.090) (0.077) (0.084) (0.085) (0.085)
Bullwhip -0.009*** -0.006* -0.000 -0.003 -0.005 -0.005
(0.003) (0.003) (0.003) (0.003) (0.003) (0.003)
Observations 13,723 13,723 13,722 13,787 13,792 13,779
R-squared 0.269 0.273 0.278 0.284 0.283 0.267

Panel C: Margin
Capacity Utilization Competitive Position
Low Medium High Low Medium High
Constant -0.027* -0.013 -0.035 -0.006 -0.016 -0.058***
(0.015) (0.020) (0.024) (0.013) (0.023) (0.019)
Bullwhip 0.003*** 0.002*** 0.002*** 0.002*** 0.002*** 0.004***
(0.001) (0.001) (0.001) (0.000) (0.001) (0.001)
Observations 13,723 13,723 13,722 13,787 13,792 13,779
R-squared 0.120 0.127 0.149 0.144 0.148 0.147

Panel D: Cost of Goods Sold (COGS)

Capacity Utilization Competitive Position
Low Medium High Low Medium High
Constant 0.719*** 0.760*** 0.715*** 0.735*** 0.710*** 0.730***
(0.017) (0.022) (0.019) (0.017) (0.019) (0.021)
Bullwhip -0.001** -0.002*** -0.001*** -0.001*** -0.001*** -0.002***
(0.000) (0.001) (0.000) (0.000) (0.000) (0.001)
Observations 13,723 13,723 13,722 13,787 13,792 13,779
R-squared 0.062 0.075 0.079 0.073 0.061 0.084

Panel E: Selling, General, and Admin (SG&A)

Capacity Utilization Competitive Position
Low Medium High Low Medium High
Constant 0.290*** 0.239*** 0.280*** 0.250*** 0.286*** 0.315***
(0.016) (0.017) (0.017) (0.013) (0.018) (0.018)
Bullwhip -0.001* -0.001* -0.001 -0.000 -0.000 -0.001***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Observations 13,723 13,723 13,722 13,787 13,792 13,779
R-squared 0.087 0.067 0.113 0.107 0.114 0.114
Table 5 presents regression results of the profitability measures on the BM bullwhip given capacity
utilization and competitive position. Capacity utilization (competitive position) is measured based on 3-
digits SIC median-adjusted PP&E turnover (Herfindahl) ratio. Low, Median, High are based on the
relevant bottom, middle, & top terciles. The regressions include firm and year fixed-effects.

34
Table 6: Matching Analysis
Panel A: First Stage Estimation Results of the Bullwhip
BM SYYZ Pos_BM
-0.895*** -2.026*** -2.137***
Constant
(0.277) (0.354) (0.404)
-0.029 0.267* 0.229
Leverage
(0.132) (0.138) (0.194)
-0.45*** 0.165 -0.047
Log of Total Assets
(0.124) (0.184) (0.19)
0.003 0.014 -0.024
Growth in Sales
(0.047) (0.032) (0.074)
0.01 0.089*** -0.074***
SeasonRatio
(0.015) (0.017) (0.026)
0.204*** 0.636*** 0.656***
Demand Persistency
(0.032) (0.07) (0.074)
0.022* 0.083*** -0.004
Sales Volatility
(0.014) (0.01) (0.021)
-0.019 -0.085 0.088
Capacity Utilization
(0.084) (0.093) (0.099)
-0.702*** -1.556*** -1.571***
Log Inventory Days
(0.196) (0.222) (0.318)
-1.269*** -5.603*** -0.422***
Log Accounts Payable Days
(0.175) (0.198) (0.183)

Panel B: Mean Covariates across High and Low Bullwhip Samples

BM SYYZ Positive BM
High Low Diff High Low Diff High Low Diff
Leverage 0.188 0.186 0.002 0.194 0.190 0.004 0.184 0.183 0.001
Log of Total Assets 5.607 5.533 0.074* 5.640 5.641 -0.001 5.443 5.442 0.001
Growth in Sales 0.080 0.083 -0.003 0.090 0.090 0.000 0.080 0.071 0.009
SeasonRatio 0.183 0.185 -0.002 0.135 0.133 0.002 0.173 0.174 -0.001
Demand Persistency 0.620 0.618 0.002 0.611 0.613 -0.003 0.603 0.605 -0.001
Sales Volatility 0.261 0.267 -0.005* 0.258 0.256 0.002 0.246 0.242 0.003
Capacity Utilization 0.519 0.503 0.017 0.636 0.614 0.022 0.523 0.568 -0.044
Log Inventory Days 4.578 4.578 0.000 4.661 4.642 0.020* 4.720 4.726 -0.006
Log Accounts Payable 3.697 3.685 0.011 3.744 3.741 0.003 3.727 3.725 0.002
Days

Panel C: Second stage Estimation Results of the Profitability-Bullwhip Relation

BM
Dependent: ROA Margin COGS SG&A SD_ROA ROME SD_RET BM
Constant 0.075*** -0.003 1.290*** -0.210*** -0.003 0.121*** 0.375*** 1.257***
(0.028) (0.036) (0.031) (0.032) (0.012) (0.013) (0.139) (0.215)
Bullwhip 0.002*** 0.003*** -0.001** -0.002*** -0.000 0.001** -0.002 -0.002
(0.001) (0.001) (0.001) (0.001) (0.000) (0.000) (0.002) (0.004)

Controls Yes Yes Yes Yes Yes Yes Yes Yes

35
 SYYZ
Dependent: ROA Margin COGS SG&A SD_ROA ROME SD_RET BM
Constant 0.125*** 0.089** 1.300*** -0.231*** -0.019 0.136*** 0.166 1.393***
(0.028) (0.039) (0.031) (0.033) (0.012) (0.013) (0.135) (0.211)
Bullwhip 0.002 0.010*** -0.003 -0.005** 0.001 -0.001 0.016* 0.037**
(0.002) (0.003) (0.002) (0.002) (0.001) (0.001) (0.009) (0.015)

Controls Yes Yes Yes Yes Yes Yes Yes Yes

Positive BM
Dependent: ROA Margin COGS SG&A SD_ROA ROME SD_RET BM
Constant 0.048 0.032 1.267*** -0.174*** -0.024 0.133*** 0.295 0.989**
(0.047) (0.061) (0.054) (0.057) (0.020) (0.022) (0.239) (0.384)
Bullwhip -0.003*** -0.003*** 0.002* 0.001 0.000 0.002*** -0.003 0.016***
(0.001) (0.001) (0.001) (0.001) (0.000) (0.000) (0.004) (0.006)

Controls Yes Yes Yes Yes Yes Yes Yes Yes

Table 6 presents results for the propensity score matched sample analysis. We match by year using firms
in the manufacturing sector. Propensity scores are estimated based on the Covariate Balancing Propensity
Score (CVPS) method of Imai and Ratkovic (2014) Panel A shows the average coefficients of the first
stage regression of the bullwhip on its determinants. The determinants of the bullwhip include the
determinants of accounting profitability (Table 2, Panel A), the determinants of the bullwhip following
Shan et al. (2013)-–seasonality of demand, log of inventory days, and log of accounts payable days-- and
capacity utilization. Standard errors are based on the Newey-West estimator. Panel B provides the mean
covariates for the treatment sample and the control sample for each bullwhip measure. Low (High)
Bullwhip denote observations from the bottom (top) tercile of the bullwhip measure. Panel C shows the
second stage regressions of accounting and market profitability, as well as their volatilities, on the
bullwhip and control variables. The control variables include all the determinants from the first stage
regression as well as other relevant control variables. The regressions include industry fixed-effects. We
also include pair fixed-effects to control for any remaining differences across pairs resulting from
imperfections in the matching procedure.

36
Figure 1 – Quantile-Quantile Plots
BM

SYYZ

The graphs provide quantile-quantile plots for each covariate across the BM and SYYZ matched samples.

37
 Online Appendix

A.1 - A Stylized Model of the Impact of the Bullwhip on Firm Profitability

The text provides testable hypotheses regarding the relation between the bullwhip and

profitability based on intuition and past literature. The intent of this appendix is to provide a

basis for these hypotheses via a model that yields closed-form solutions. Specifically, we model

the effect of bullwhip on profitability utilizing a stylized single server M/G/1 queue

production/inventory model of the firm. (See Gavish and Graves (1980), for example, regarding

production/inventory queueing models.)

The firm is considered to operate a single server queue consisting of the following three

elements: (i) work arrives at a server (input) based on exogenous product demand; (ii) the server

performs its tasks on the arriving work; and (iii) the completed work exits the system (output).

Our stylized model ignores that the output of one operation may become the input to another

operation. As we will show next, this model allows us to tie the bullwhip to the variability of

the firm’s operations and, thus, to its mean profitability and to the volatility of its profitability.

We measure the rate at which demand arrives at the firm and the production rate in

terms of dollars per period of time. We denote the rate at which demand arrives at the firm, i.e.,

the arrival rate, by λ. Similarly, the production rate is designated by µ where µ=1/p and p is the

average processing time per dollar for the firm. We think of µ as the bottleneck rate for the

firm. We consider the distribution of the processing time as the firm’s endogenous production

decision. A distribution with a lower (higher) variability will result in a lower (higher) internal

bullwhip effect.

For example, with 250 working days per year of 8 hours each, we have a total of

120,000 working minutes per year. A firm with revenues of $1.2M per year has a time between

arrivals of 1/$1.2M year, i.e., a $1 demand every 120,000/1.2M=1/10 of a minute. Thus, this

firm sells at a rate of $1 per 6 seconds, i.e., λ=1/6 dollars per second. Similarly, if the time to

manufacture a product that is sold at $1 is p=4 seconds, then the processing rate is µ=1/4 dollars

per second.

38
 We assume the firm has sufficient production capacity so that every arrival departs. If

the average work arrives faster than average completion, the firm’s order book will consistently

increase. We assume that the latter does not occur.

We define the capacity utilization of a firm, ρ, by comparing its demand rate and

capacity:

𝜆𝜆
𝜌𝜌 =
𝜇𝜇

As the term “utilization” suggests, it is the fraction of time that the firm is actually busy, as

opposed to waiting for work. The assumption that the firm has sufficient capacity is equivalent

to, λ < µ, i.e., ρ < 1. The latter assumption further implies that the arrival rate equals the

departure rate. (Certainly no more than λ can depart and if the arrival rate is λ on average, no

fewer than λ units will depart if there is adequate capacity.) As a consequence, the arrival rate

is the throughput rate and the firm’s revenues can be used to estimate the arrival rate.

Virtually all firms face variability: orders arrive at random times, machines break

down, the business cycle varies, etc. As is common, we measure the variability in the arrivals

and the firm's production processing ability by:

𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑜𝑜𝑜𝑜 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑝𝑝𝑝𝑝𝑝𝑝 𝑀𝑀𝑀𝑀𝑀𝑀𝑡𝑡ℎ

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉, 𝐶𝐶𝐶𝐶𝑎𝑎 =
�𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑝𝑝𝑝𝑝𝑝𝑝 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ

𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑜𝑜𝑜𝑜 $ 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 𝑝𝑝𝑝𝑝𝑝𝑝 𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤 ℎ𝑜𝑜𝑜𝑜𝑜𝑜

Processing Variability, =
�𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝑜𝑜𝑜𝑜 $ 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 𝑝𝑝𝑝𝑝𝑝𝑝 𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑛𝑛𝑔𝑔 ℎ𝑜𝑜𝑜𝑜𝑜𝑜

Note that the greater the variability, the larger are these metrics. Moreover, while we

assume CVa is exogenously given, the firm’s operations control CVp, which is thus endogenous

to the firm.

In addition, firms face variability in the departure process. Let CVd denote the

variability of departure. Following Bitran and Tirupati (1988, equation 2),

𝐶𝐶𝑉𝑉𝑑𝑑2 = 𝜌𝜌2 𝐶𝐶𝑉𝑉𝑝𝑝2 + (1 − 𝜌𝜌2 )𝐶𝐶𝑉𝑉𝑎𝑎2 (A1)

so that

𝐶𝐶𝑉𝑉𝑑𝑑2 −�1−𝜌𝜌2 �𝐶𝐶𝑉𝑉𝑎𝑎2

𝐶𝐶𝑉𝑉𝑝𝑝2 = 𝜌𝜌2
. (A2)

Defining the bullwhip at the firm level as the amplification of the variability from the

arrival process to the departure process, yields the bullwhip metric:

39
 𝐶𝐶𝐶𝐶 2
𝐵𝐵𝐵𝐵 = 𝐶𝐶𝐶𝐶𝑑𝑑2 − 1. (A3)
𝑎𝑎

If BW>0, the firm increases variability in the supply chain and if BW<0 the firm decreases

variability.

Firm profits is revenues minus costs. Costs include cost of raw material, cost of

production capacity, and cost of holding inventory. Let m denote the margin on the raw material

to final product, c the cost of capacity per unit and h holding costs per $1 of inventory. Profits

can then be written as:

Profits = m (arrivals) –c (capacity) – h (Inventory) (A4)

Expected profits can then be written in terms of the expected margin net of raw materials and

operating expenses, λm, the expected cost of production capacity, cµ, and expected inventory

costs, hE[Inv], where E denotes expectation. Average inventory held at a single server system

can be approximated by Kingman’s formula--see Kingman (1961)-- which together with

Little’s law implies:

𝜌𝜌2 𝐶𝐶𝐶𝐶𝑎𝑎2 +𝐶𝐶𝐶𝐶𝑝𝑝2

𝐸𝐸[𝐼𝐼𝐼𝐼𝐼𝐼] = 1−𝜌𝜌 � 2
� + 𝜌𝜌. (A5)

The firm’s expected profits are then:

𝜌𝜌2 𝐶𝐶𝐶𝐶𝑎𝑎2 +𝐶𝐶𝐶𝐶𝑝𝑝2

𝐸𝐸[𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃] = 𝜆𝜆𝜆𝜆 − 𝑐𝑐𝑐𝑐 − ℎ𝐸𝐸[𝐼𝐼𝐼𝐼𝐼𝐼] = 𝜆𝜆𝜆𝜆 − 𝑐𝑐𝑐𝑐 − ℎ �1−𝜌𝜌 � 2
� + 𝜌𝜌�. (A6)

We next formulate expected profits in (A6) as a direct function of the bullwhip

disregarding the indirect consequences of the bullwhip on profits, e.g., from changes in the

required utilization to operate effectively. Specifically, rewriting (A2) in terms of BW –see

(A3)--we get:

𝐵𝐵𝐵𝐵+𝜌𝜌2
𝐶𝐶𝑉𝑉𝑝𝑝2 = 𝐶𝐶𝑉𝑉𝑎𝑎2 𝜌𝜌2
, (A7)

Substituting (A7) into (A6) yields:

𝐵𝐵𝐵𝐵 + 𝜌𝜌2
𝜌𝜌 𝐶𝐶𝐶𝐶𝑎𝑎2 + 𝐶𝐶𝑉𝑉𝑎𝑎2
𝜌𝜌2
𝐸𝐸[𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃] = 𝜆𝜆𝜆𝜆 − 𝑐𝑐𝑐𝑐 − ℎ � � − ℎ𝜌𝜌
1 − 𝜌𝜌 2

𝐶𝐶𝐶𝐶 2
𝑎𝑎
= 𝜆𝜆𝜆𝜆 − 𝑐𝑐𝑐𝑐 − ℎ 2𝜌𝜌(1−𝜌𝜌) (𝐵𝐵𝐵𝐵 + 2𝜌𝜌2 ) − ℎ𝜌𝜌. (A8)

40
Equation (A8) shows that expected profits and the bullwhip are inversely related. (Being an

exogenous demand input, it is legitimate to factor out 𝐶𝐶𝐶𝐶𝑎𝑎2 from BW in (A8). In contrast,

factoring out 𝐶𝐶𝐶𝐶𝑝𝑝2 from (A8) is less sensible, because 𝐶𝐶𝐶𝐶𝑝𝑝2 is endogenous to the firm’s

production decisions.)

The effect of the bullwhip on the variance of profits can be obtained from (A4) by

assuming independence among the arrivals, capacity and inventory. (The zero covariance

between capacity, a long-run firm decision, and realized demand is far more defensible than

the assumption of zero covariances between inventory and each of capacity and demand. In any

case, this assumption simplifies the analysis and is likely to have a minor impact on the sign of

the relation between the variance of profits and the bullwhip.) Therefore, we estimate

𝑉𝑉𝑉𝑉𝑉𝑉(𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃) = 𝑚𝑚2 𝑉𝑉𝑉𝑉𝑉𝑉(𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎) + 𝑐𝑐 2 𝑉𝑉𝑉𝑉𝑉𝑉(𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐) + ℎ2 𝑉𝑉𝑉𝑉𝑉𝑉[𝐼𝐼𝐼𝐼𝐼𝐼]. (A9)

From Gross and Harris (1985, Chapter 5) and Zipkin (1995), the variance of the

inventory (queue length in an M/G/1 queue) is:

𝐸𝐸(𝑝𝑝3 ) 𝑝𝑝3
𝑉𝑉𝑉𝑉𝑉𝑉(𝐼𝐼𝐼𝐼𝐼𝐼) = 𝐸𝐸(𝐼𝐼𝐼𝐼𝐼𝐼) + 𝐸𝐸(𝐼𝐼𝐼𝐼𝐼𝐼)2 + � 3 � �1−𝜌𝜌� (A10)
3𝐸𝐸(𝑝𝑝)

Substituting the expected inventory yields:

2
𝐶𝐶𝐶𝐶𝑎𝑎2 𝐶𝐶𝐶𝐶 2 𝐸𝐸(𝑝𝑝3 ) 𝑝𝑝3
𝑉𝑉𝑉𝑉𝑉𝑉(𝐼𝐼𝐼𝐼𝐼𝐼) = �
2𝜌𝜌(1−𝜌𝜌)
(𝐵𝐵𝐵𝐵 + 2𝜌𝜌2 )� + �2𝜌𝜌(1−𝜌𝜌)
𝑎𝑎
(𝐵𝐵𝐵𝐵 + 2𝜌𝜌2 )� + �
3𝐸𝐸(𝑝𝑝)3
� �1−𝜌𝜌�. (A11)

Substituting (A11) into (A9) yields:

𝑉𝑉𝑉𝑉𝑉𝑉(𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃) = 𝑚𝑚2 𝑉𝑉𝑉𝑉𝑉𝑉(𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎) + 𝑐𝑐 2 𝑉𝑉𝑉𝑉𝑉𝑉(𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐)

2
𝐶𝐶𝐶𝐶 2 𝐶𝐶𝐶𝐶 2 𝐸𝐸(𝑝𝑝3 ) 𝑝𝑝3
+ℎ2 �2𝜌𝜌(1−𝜌𝜌)
𝑎𝑎
(𝐵𝐵𝐵𝐵 + 2𝜌𝜌2 ) + � 𝑎𝑎
2𝜌𝜌(1−𝜌𝜌)
(𝐵𝐵𝐵𝐵 + 2𝜌𝜌2 )� + � 3 � �1−𝜌𝜌��. (A12)
3𝐸𝐸(𝑝𝑝)

Equation (A12) shows that variance of profits and the bullwhip are positively related.

Finally, we note that the strength of the relations between the expected profit and

bullwhip effect and their variances depend on the capacity utilization 𝜌𝜌. In particular, it is

straightforward to show from (A8) that, as long as capacity utilization is greater than 50%, a

fairly innocuous assumption, increased capacity utilization increases the negative impact of the

bullwhip on expected profits. Furthermore, (A12) indicates that as long as capacity utilization

41
is greater than 50%, increased capacity utilization increases the positive impact of the bullwhip

on the volatility of profits.

References

Gavish, B. and S.C. Graves. 1980. A one-product production/inventory problem under

continuous review policy. Operations Research 28(5): 1228-1236.

Kingman, J. F. C. 1961. The single server queue in heavy traffic. Mathematical Proceedings of

the Cambridge Philosophical Society 57 (4): 902-904.

42
 A.2 – Additional Empirical Results

Table 1_OA: Profitability and the Bullwhip

Panel A: Return on Assets (CFO)

BM BM SYYZ SYYZ Rank_BM Rank_SYYZ Pos_BM Pos_BM
Constant 0.095*** 0.104*** 0.086*** 0.095*** 0.100*** 0.102*** 0.093*** 0.115***
(0.005) (0.009) (0.007) (0.010) (0.009) (0.010) (0.008) (0.012)
Bullwhip 0.001*** 0.001*** 0.007** 0.008*** 0.001*** 0.000 -0.003*** -0.002***
(0.000) (0.000) (0.003) (0.003) (0.000) (0.001) (0.001) (0.001)
Controls N Y N Y Y Y N Y
Observations 41,358 41,358 41,358 41,358 41,358 41,358 21,715 21,715
R-squared 0.010 0.105 0.010 0.105 0.105 0.104 0.011 0.108

Panel B: Return on Equity (ROE)

BM BM SYYZ SYYZ Rank_BM Rank_SYYZ Pos_BM Pos_BM
Constant 0.122*** 0.003 0.124*** 0.005 -0.010 0.019 0.123*** 0.074***
(0.011) (0.022) (0.014) (0.024) (0.022) (0.022) (0.018) (0.028)
Bullwhip 0.006*** 0.005*** -0.001 -0.000 0.003*** -0.003** -0.004*** -0.004***
(0.001) (0.001) (0.008) (0.007) (0.000) (0.001) (0.001) (0.001)
Controls N Y N Y Y Y N Y
Observations 41,358 41,358 41,358 41,358 41,358 41,358 21,715 21,715
R-squared 0.020 0.134 0.018 0.132 0.134 0.133 0.021 0.132
Panels A, and B present regression results of the CFO and ROE on the bullwhip and control variables,
respectively. BM, SYYZ, Rank_BM, Rank_SYYZ, Pos_BM columns show regressions where the
Bullwhip variable is based on the Bray and Mendelson (2012), the Shan et al. (2014), rank of BM
(based on deciles formed on the basis of BM), rank of SYYZ (based on deciles formed on the basis of
SYYZ), positive values of BM measures, respectively. The regressions are estimated using firm and
year fixed-effects. Standard errors are clustered at the firm level.

43
 Table 2_OA: Volatilities and the Bullwhip

Panel A: Volatility of CFO

BM BM SYYZ SYYZ Rank_BM Rank_SYYZ Pos_BM Pos_BM
Constant 0.085*** 0.086*** 0.083*** 0.084*** 0.085*** 0.084*** 0.083*** 0.081***
(0.001) (0.005) (0.002) (0.005) (0.005) (0.005) (0.002) (0.006)
Bullwhip -0.000 -0.000 0.002 0.002 0.000** 0.000** 0.000 -0.000
(0.000) (0.000) (0.001) (0.001) (0.000) (0.000) (0.000) (0.000)
Controls N Y N Y Y Y N Y
Observations 41,358 41,358 41,358 41,358 41,358 41,358 21,715 21,715
R-squared 0.006 0.075 0.006 0.075 0.075 0.076 0.007 0.076

Panel B: Volatility of ROE

BM BM SYYZ SYYZ Rank_BM Rank_SYYZ Pos_BM Pos_BM
Constant 0.117*** 0.180*** 0.115*** 0.181*** 0.179*** 0.182*** 0.116*** 0.181***
(0.007) (0.031) (0.009) (0.032) (0.031) (0.031) (0.007) (0.037)
Bullwhip -0.000 -0.000 0.001 -0.000 0.000 -0.000 -0.000 -0.001
(0.000) (0.000) (0.005) (0.005) (0.000) (0.001) (0.000) (0.000)
Controls N Y N Y Y Y N Y
Observations 41,358 41,358 41,358 41,358 41,358 41,358 21,715 21,715
R-squared 0.060 0.165 0.060 0.165 0.165 0.165 0.062 0.172
The table presents regression results of the volatilities of each of CFO and ROE on the bullwhip
measures. The regressions are estimated using firm and year fixed-effects. Standard errors are clustered
at the firm level

Table 3_OA: Profitability & the Bullwhip Given Capacity Utilization & Competitive
Position

Panel A: ROA and SYYZ

Capacity Utilization Competitive Position
Low Medium High Low Medium High
Constant 0.031* 0.058*** -0.012 0.063*** 0.033* -0.001
(0.016) (0.015) (0.018) (0.015) (0.019) (0.015)
Bullwhip -0.002 0.004 0.006 0.003 -0.002 0.003
(0.005) (0.006) (0.005) (0.006) (0.005) (0.005)
Controls Y Y Y Y Y Y
Observations 13,722 13,724 13,722 13,787 13,792 13,779
R-squared 0.202 0.192 0.214 0.216 0.229 0.211

Panel B: ROA and Pos_BM

Capacity Utilization Competitive Position
Low Medium High Low Medium High
Constant 0.029 0.093*** 0.027 0.087*** 0.046** 0.030*
(0.018) (0.015) (0.018) (0.017) (0.022) (0.017)
Bullwhip -0.001* -0.002** -0.003*** -0.001 -0.002*** -0.001*
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
Controls Y Y Y Y Y Y
Observations 7,291 7,324 6,990 6,966 7,182 7,567
R-squared 0.210 0.204 0.249 0.228 0.252 0.222

44
 Panel C: ROME and SYYZ
Capacity Utilization Competitive Position
Low Medium High Low Medium High
Constant -0.205* -0.277*** -0.498*** -0.167* -0.353*** -0.379***
(0.107) (0.097) (0.086) (0.090) (0.096) (0.095)
Bullwhip -0.001 -0.009 0.041 0.008 0.044 0.006
(0.032) (0.028) (0.025) (0.025) (0.028) (0.029)
Controls Y Y Y Y Y Y
Observations 13,723 13,724 13,722 13,788 13,792 13,779
R-squared 0.268 0.273 0.278 0.284 0.283 0.267

Panel D: ROME and Pos_BM

Capacity Utilization Competitive Position
Low Medium High Low Medium High
Constant -0.182 -0.189* -0.519*** -0.115 -0.286** -0.326***
(0.146) (0.111) (0.107) (0.110) (0.128) (0.111)
Bullwhip -0.007 -0.007 -0.002 0.001 -0.002 -0.009
(0.005) (0.005) (0.004) (0.004) (0.004) (0.005)
Controls Y Y Y Y Y Y
Observations 7,291 7,324 6,990 6,966 7,182 7,567
R-squared 0.269 0.264 0.272 0.276 0.284 0.262
The table presents regression results of the profitability measures (ROA and ROME) for the SYYZ and
Positive BM bullwhip measures given capacity utilization and competitive position. Capacity utilization
(competitive position) is measured based on 3-digits sic median adjusted PP&E turnover (Herfindahl
ratio). Low, Median, High are based on the relevant bottom, middle, & top tercile. The regressions
include firm and year fixed-effects.

Table 4_OA: Margins & the Bullwhip Given Capacity Utilization & Competitive
Position

Panel A: Margin and SYYZ

Capacity Utilization Competitive Position
Low Medium High Low Medium High
Constant -0.030* -0.029 -0.051** -0.007 -0.014 -0.071***
(0.016) (0.021) (0.025) (0.015) (0.024) (0.021)
Bullwhip 0.005 0.016** 0.009 0.003 0.001 0.014*
(0.005) (0.008) (0.007) (0.005) (0.006) (0.007)
Observations 13,722 13,724 13,722 13,787 13,792 13,779
R-squared 0.117 0.127 0.148 0.141 0.147 0.145

Panel B: COGS and SYYZ

Capacity Utilization Competitive Position
Low Medium High Low Medium High
Constant 0.724*** 0.766*** 0.728*** 0.736*** 0.716*** 0.736***
(0.018) (0.024) (0.021) (0.019) (0.021) (0.022)
Bullwhip -0.007 -0.011 -0.010 -0.004 -0.004 -0.013
(0.006) (0.009) (0.007) (0.007) (0.007) (0.008)
Observations 13,722 13,724 13,722 13,787 13,792 13,779
R-squared 0.061 0.073 0.079 0.070 0.060 0.082

45
 Panel C: SG&A and SYYZ
Capacity Utilization Competitive Position
Low Medium High Low Medium High
Constant 0.293*** 0.245*** 0.293*** 0.254*** 0.290*** 0.326***
(0.016) (0.019) (0.017) (0.014) (0.018) (0.019)
Bullwhip 0.001 -0.002 -0.004 -0.001 -0.003 -0.002
(0.006) (0.007) (0.006) (0.005) (0.006) (0.007)
Observations 13,722 13,724 13,722 13,787 13,792 13,779
R-squared 0.086 0.065 0.111 0.106 0.115 0.111
The table presents regression results of the profitability and expense measures on the SYYZ bullwhip
given capacity utilization and competitive position. Capacity utilization (competitive position) is
measured based on 3-digits SIC median-adjusted PP&E turnover (Herfindahl) ratio. Low, Median, High
are based on the relevant bottom, middle, & top terciles. The regressions include firm and year fixed-
effects.

Table 5_OA: Additional Estimation Methods

Panel A: Quantile Regressions of Profitability on the Bullwhip

BM SYYZ
ROA Margin COGS SG&A ROA Margin COGS SG&A
Bullwhip-Q25 0.002*** 0.001*** -0.001*** -0.001*** 0.001 0.003*** -0.006*** -0.001
(0.000) (0.000) (0.000) (0.000) (0.002) (0.001) (0.002) (0.001)
Bullwhip-Q50 0.001*** 0.001*** -0.001*** -0.000*** -0.00 0.002*** 0.037*** -0.002*
(0.000) (0.000) (0.000) (0.000) (0.001) (0.001) (0.003) (0.001)
Bullwhip-Q75 0.002*** 0.001*** -0.001*** -0.000*** 0.001 0.005*** -0.009*** -0.001
(0.000) (0.000) (0.000) (0.000) (0.002) (0.002) (0.001) (0.001)
Observations 41,358 41,358 41,358 41,358 41,358 41,358 41,358 41,358

Panel B: Balanced Entropy

BM SYYZ
ROA Margin COGS SG&A ROA Margin COGS SG&A
Constant 0.087*** 0.027 1.458*** -0.396*** 0.097*** 0.049* 1.553*** -0.478***
(0.013) (0.017) (0.029) (0.024) (0.019) (0.029) (0.036) (0.032)
High 0.011*** 0.012*** -0.006*** -0.004** 0.009** 0.020*** -0.005 -0.008
Bullwhip
(0.001) (0.002) (0.002) (0.002) (0.004) (0.005) (0.006) (0.006)
Observations 27,434 27,434 27,434 27,434 27,455 27,455 27,455 27,455
R-squared 0.248 0.182 0.376 0.428 0.243 0.180 0.416 0.472
Panel A presents Quantile Regression results of the accounting profitability and expense measures on
the BM and SYYZ bullwhip measures. Q25, Q50, and Q75 denote the 25%, 50%, and 75% quantiles,
respectively. Panel B provides matched sample regressions based on the Balanced Entropy approach of
Hainmueller (2012). The analysis involves matched sample of high bullwhip (treatment sample) and low
bullwhip firms (control sample). The matching analysis is executed as follows: For each fiscal year, we
rank the sample firms into terciles based on the specific bullwhip measure, and match firms from the top
tercile (treatment sample, high bullwhip) with firms in the bottom tercile (control sample, low bullwhip).
We then use entropy balancing to achieve covariate balance between the two sample, where the
covariates include leverage, sales growth, log of total assets (a measure of size), demand persistency and
sales volatility, the Shan et al. (2014) seasonality ratio, inventory days, and days accounts payable. We
also include capacity utilization, year and sector. We then estimate the regressions using weighted least
square where the weighs are obtained in the entropy balancing stage.

46