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Article: Stock-price reactions to LIFO adoptions - the association between excess returns and LIFO tax savings

TitleStock-price reactions to LIFO adoptions - the association between excess returns and LIFO tax savings
Authors
Issue Date1982
Citation
Journal Of Accounting Research, 1982, v. 20 n. 2, p. 551-588 How to Cite?
AbstractChanges in inventory costing methods, especially those involving the last-in, first-out (LIFO) cost-flow assumption, can generate potentially large changes in a firm's cash flows due to their impact on taxable earnings. These cash-flow effects provide not only a motive for LIFO changes (which is consistent with the market value rule) but also implications for associated stock price effects: if investors react to LIFO's cash-flow implications rather than to its effects on reported earnings, then positive stock price adjustments should be associated with LIFO adjustments. However, it was noted that the previous studies have considered only a dichotomous variable, whether or not a firm has adopted LIFO. Most firms switching to LIFO now reveal in their financial statement disclosures the tax savings which have been realized. This study uses these disclosures to examine the association between unsystematic returns and the magnitudes of first-year LIFO tax savings for all NYSE firms which adopted or extended their use of LIFO during the period 1972-80. The research design employs within-group comparisons based on cumulative monthly unsystematic (excess) returns with appropriate controls for unexpected earnings performance. This design avoids several methodological weaknesses inherent in the previous studies and allows more definitive tests of hypotheses relating investor reactions to the income and cash-flow effects of LIFO adoptions. As reported more fully below, results based on LIFO adoptions made in 1974 are consistent with a positive association between cumulative excess stock returns and the magnitudes of LIFO tax savings. The results also provide evidence that changes in systematic risk may accompany LIFO adoptions. However, contrary to previous studies, most of the sample firms exhibit downward rather than upward changes in systematic risk.
Persistent Identifierhttp://hdl.handle.net/10722/128991
ISSN
2015 Impact Factor: 2.243
2015 SCImago Journal Rankings: 5.733
SSRN
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorBiddle, GCen_US
dc.contributor.authorLindahl, FWen_US
dc.date.accessioned2010-12-09T03:05:30Z-
dc.date.available2010-12-09T03:05:30Z-
dc.date.issued1982en_US
dc.identifier.citationJournal Of Accounting Research, 1982, v. 20 n. 2, p. 551-588en_US
dc.identifier.issn0021-8456en_US
dc.identifier.urihttp://hdl.handle.net/10722/128991-
dc.description.abstractChanges in inventory costing methods, especially those involving the last-in, first-out (LIFO) cost-flow assumption, can generate potentially large changes in a firm's cash flows due to their impact on taxable earnings. These cash-flow effects provide not only a motive for LIFO changes (which is consistent with the market value rule) but also implications for associated stock price effects: if investors react to LIFO's cash-flow implications rather than to its effects on reported earnings, then positive stock price adjustments should be associated with LIFO adjustments. However, it was noted that the previous studies have considered only a dichotomous variable, whether or not a firm has adopted LIFO. Most firms switching to LIFO now reveal in their financial statement disclosures the tax savings which have been realized. This study uses these disclosures to examine the association between unsystematic returns and the magnitudes of first-year LIFO tax savings for all NYSE firms which adopted or extended their use of LIFO during the period 1972-80. The research design employs within-group comparisons based on cumulative monthly unsystematic (excess) returns with appropriate controls for unexpected earnings performance. This design avoids several methodological weaknesses inherent in the previous studies and allows more definitive tests of hypotheses relating investor reactions to the income and cash-flow effects of LIFO adoptions. As reported more fully below, results based on LIFO adoptions made in 1974 are consistent with a positive association between cumulative excess stock returns and the magnitudes of LIFO tax savings. The results also provide evidence that changes in systematic risk may accompany LIFO adoptions. However, contrary to previous studies, most of the sample firms exhibit downward rather than upward changes in systematic risk.-
dc.languageengen_US
dc.relation.ispartofJournal Of Accounting Researchen_US
dc.titleStock-price reactions to LIFO adoptions - the association between excess returns and LIFO tax savingsen_US
dc.typeArticleen_US
dc.identifier.openurlhttp://library.hku.hk:4550/resserv?sid=HKU:IR&issn=0021-8456&volume=20&spage=551&epage=&date=1982&atitle=STOCK-PRICE+REACTIONS+TO+LIFO+ADOPTIONS+-+THE+ASSOCIATION+BETWEEN+EXCESS+RETURNS+AND+LIFO+TAX+SAVINGSen_US
dc.identifier.emailBiddle, GC:biddle@hku.hken_US
dc.identifier.authorityBiddle, GC=rp00230en_US
dc.description.naturelink_to_subscribed_fulltexten_US
dc.identifier.doi10.2307/2490886-
dc.relation.referenceshttp://apps.isiknowledge.com/CitedRefList.do?product=WOS&search_mode=CitedRefList&db_id=WOS&UT=A1982QL89000003en_US
dc.identifier.volume20en_US
dc.identifier.issue2en_US
dc.identifier.spage551en_US
dc.identifier.epage588en_US
dc.identifier.isiWOS:A1982QL89000003en_US
dc.identifier.ssrn1673110-

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