Stock Price Effects of the Allowance of Lifo for Tax Purposes

Abstract

Note: The following is a description of the paper and is not the actual abstract.

Many studies have investigated share price behavior associated with firms' voluntary adoptions of the last-in, first-out inventory method, and a review of the literature provides a rich set of mixed and conflicting results. Instead of focusing on firms' LIFO adoption decisions, I investigate stock price behavior associated with the origins of LIFO as an acceptable tax accounting procedure. More specifically, I examine stock price behavior associated with the 1938 and 1939 legislative events that led to LIFO's inclusion in the U.S. tax code. The results indicate the presence of a positive net market reaction to events leading to LIFO's allowance for tax purposes for firms in the sample having the largest estimated LIFO tax benefits. The evidence supports the conclusion that investors revised their probabilities that firms most likely to benefit would opt to use LIFO and defer taxes on inventory profits.

JEL Classification: G14, H25, M41, N22