Inventory policy, accruals quality and information risk

Inventory policy, accruals quality and information risk This paper provides evidence consistent with firms with Last-in-first-out (LIFO) inventory policy being priced by the market as having lower information risk than First-in-first-out (FIFO) firms. Furthermore, the paper shows that this pricing differential is sustained after controlling for accruals quality, suggesting that the inventory policy signals some information risk characteristics that are not captured by accruals quality measure. We investigate the relation between inventory policy and accruals quality and find that accruals quality is systematically worse for FIFO firms than for LIFO firms after controlling for correlated omitted variables and known firm attributes. These findings complement the currently established relationship between the cost of capital, market pricing and accruals quality by focusing on the need for understanding the incremental effects of individual accounting policies. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Inventory policy, accruals quality and information risk

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Publisher
Springer Journals
Copyright
Copyright © 2008 by Springer Science+Business Media, LLC
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-008-9067-2
Publisher site
See Article on Publisher Site

Abstract

This paper provides evidence consistent with firms with Last-in-first-out (LIFO) inventory policy being priced by the market as having lower information risk than First-in-first-out (FIFO) firms. Furthermore, the paper shows that this pricing differential is sustained after controlling for accruals quality, suggesting that the inventory policy signals some information risk characteristics that are not captured by accruals quality measure. We investigate the relation between inventory policy and accruals quality and find that accruals quality is systematically worse for FIFO firms than for LIFO firms after controlling for correlated omitted variables and known firm attributes. These findings complement the currently established relationship between the cost of capital, market pricing and accruals quality by focusing on the need for understanding the incremental effects of individual accounting policies.

Journal

Review of Accounting StudiesSpringer Journals

Published: Feb 2, 2008

References

  • Abnormal returns to a fundamental analysis strategy
    Abarbanell, J.; Bushee, B.
  • Accruals and the prediction of future cash flows
    Barth, M; Cram, D; Nelson, K
  • Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals
    Dechow, P. M.
  • Information and the cost of capital
    Easley, D.; O’Hara, M.
  • Expected return, realized return, and asset pricing tests
    Elton, E. J.
  • Industry costs of equity
    Fama, E. F.; French, K. R.

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