A Real Options Asset Pricing Model With Seasonal Sales and Inventory Building

We develop a real options model in which a firm exposed to seasonal variations in its output price is able to produce output, store it, and sell it later, separating the production and selling decisions. The model suggests that the optimal policy for a firm with low inventory costs is to spread out its production over some period up to its high price season, hold its output in inventory until that season, and sell it then. Doing so, such a firm gradually lowers its operating leverage and thus its expected return up until its high price season. Conversely, the optimal policy for a firm with high inventory costs is to produce its output closer to its high price season, inducing its expected return to be more stable over time. In accordance with our model, we show that Grullon et al.’s (2020) result that single-stock returns tend to be lower (higher) in their high (low) seasonal sales quarters is attributable to inventory building firms, suggesting that neoclassical finance theory aligns with that evidence.