Analyst Forecast Errors and Stock Price Behavior Near the Earnings Announcement Dates of LIFO Adopters

Abstract

Between June 1974 and May 1975 over 400 firms on the New York and American stock exchanges adopted the last-in, first-out (LIFO) inventory costing method. Responding to the first round of double-digit inflation since WWII, these firms were able to assign their newer and thus higher inventory costs to units sold, thereby realizing substantial tax savings.1 However, Ricks [1982] found that stock returns near the earnings disclosure dates of 1974 LIFO adopters were negative and significantly lower than returns near the earnings disclosure dates of firms not using LIFO. Given that firms adopting LIFO in 1974 were voluntarily switching to an accounting method providing often significant..