Inventory Method LIFO Changes: Impact on Firm Risk

John R. Wingender Jr.¹, Thomas J. Purcell III JD², Thomas A. Shimerda²  
(1. Economics and Finance Department, Creighton University, USA;
2. Accounting Department, Creighton University, USA)

Abstract: The corporate decision to switch any part of a company’s GAAP inventory valuation method from FIFO (First In, First Out) to LIFO (Last In, First Out) or from LIFO to FIFO may have an impact on firm value and on firm risk. Original research on this topic found significant positive abnormal returns from the adoption of LIFO, but the results were inconclusive for its impact on firm risk. The choice of using LIFO or not is back in the news today as the US considers adopting International Financial Reporting Standards (IFRS). Today’s economic conditions are also much different than when the original studies were done during the high inflation rates in the 1970s. In the 21st Century inflation rates have been much lower. We investigate the impact of any inventory method change on firm value and on firm risk with data starting in 2000. In our sample, we find a significant positive impact on firm value from inventory accounting changes (which is surprising given the low inflation environment of this sample) and find significant changes in firm risk.

Key words: LIFO; accounting changes; volatility; CAR; event study

JEL codes: G10, F18