INVESTOR REACTION TO DISCLOSURES OF 1974-75 LIFO ADOPTION DECISIONS

• 成果类型: Article
• 署名作者: JENNINGS, R; MEST, DP; THOMPSON, RB
• 署名单位: University System of Maryland; University of Maryland College Park
• 刊物名称: ACCOUNTING REVIEW
• ISSN/ISSBN: 0001-4826
• 发表日期: 1992
• 页码: 337-354
• 关键词: inventory accounting methods; stock-price reactions; EXCESS RETURNS; fifo decision; tax savings; CHOICE; association; OWNERSHIP; POLICY

摘要

SYNOPSIS AND INTRODUCTION: During 1974-75, more than a fourth of the manufacturing and merchandising firms listed on the New York Stock Exchange and the American Stock Exchange adopted or extended their use of the last-in, first-out (LIFO) method of inventory accounting. Because a change to LIFO accounting can materially affect a firm's cash flows, the stock price behavior of firms adopting LIFO during fiscal year 1974 has been studied extensively. However, existing studies provide little evidence that stock price movements during the period were directly linked with LIFO adoption. In this article, we report the results of new tests for a stock price response to disclosures of 1974 LIFO decisions by both adopting and nonadopting firms. Our tests assume that, prior to disclosure, prices reflect available information about the likelihood of LIFO adoption. This implies (for both groups of firms) that the stock price change in response to disclosure of the LIFO decision depends on investors' revisions in their beliefs regarding the probability of adoption caused by the disclosure. We use this implication to design tests of the null hypothesis of no association between stock price movements and the disclosure of 1974 LIFO decisions. Our tests are based on a sample of 487 firms that could have adopted LIFO during fiscal 1974. For each firm, we first identify an interval that includes the disclosure of its LIFO decision. We then estimate the probability of LIFO adoption at the beginning of that interval on the basis of information that was available at the time. Finally, we regress disclosure-interval stock returns on revisions in the probability of adoption resulting from disclosure of the decision. Our results provide strong evidence of a price response for nonadopting firms and weaker evidence of a price response for adopting firms.