Can Global Sourcing Strategy Predict Stock Returns?

We find that firms' global sourcing strategy (GSS) strongly predicts their future stock returns. Using a transaction-level imports dataset for the period 2008 to 2019, we measure US public firms' five GSS choices: the extent of global sourcing; supplier relationship strength; supplier concentration; sourcing lead time; and sourcing countries' logistical efficiency. For each of the five measures, we examine returns of a zero-cost portfolio investment strategy that entails buying from the highest and selling from the lowest quintile of that measure. Collectively these investment strategies, benchmarked to the Fama-French-Carhart four-factor model, yield an average annual abnormal return of 6% to 9.6% with value-weighted portfolios, and 6% to 13.9% with equal-weighted portfolios. Furthermore, these measures exhibit incremental return predictability over other operations-motivated return predictors such as inventory turnover, and the return predictability is persistent across different supply chain positions. The predictive power of GSS measures is robust to alternate risk models, sample construction, inventory measures, and empirical specifications