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We explain the puzzling empirical evidence on the investory accounting choice through a management signaling argument. We assert that firms with lower nominal production costs than other firms have relatively less to gain from the tax advantages assocaited with LIFO adoption. For these firms, future nominal production costs are lower due to increased efficiency or technological improvements. Because of asymmetric information about future costs, and the moral hazard problem of direct communication, the managers of the more efficient firms are able to credibly communicate their production superiority by using the FIFO accounting method.We show in this paper that, if firms can choose the fraction of their inventory which is allocated to FIFO and LIFO, then a separating equillibrium exists in which firms with lower production costs signal their greater efficiency by allocating a higher fraction of their invetory to FIFO.

We provide insights to the effects of corporate governance mechanisms and earnings management on market liquidity (measured by bid–ask spreads [B_As] and trading volume) in a setting characterized by highly concentrated noninstitutional ownership. First, we document that high noninstitutional ownership increases B_As and depresses trading volumes. Next, we show that volume of trade tends to be higher and B_A tends to be lower for firms with better corporate governance mechanisms (e.g., board independence and CEO–chairman separation) when there is high concentration of noninstitutional ownership. In contrast to prior findings, when controlling for corporate governance quality, B_As are unaffected by earnings management, while trading volume increases when earnings management is higher, presumably due to an increase in investor disagreement. Our results are robust to changes in the market trading system across the sample period. [ABSTRACT FROM PUBLISHER]

The corporate governance literature advances the idea that certain aspects of a board of directors’ structure improve the monitoring of managerial decisions. Among these decisions are a manager’s policies about managing earnings. Prior studies have shown that earnings management in widely held public companies is less prevalent when there is a high level of board independence. However, there is less evidence regarding the effectiveness of board independence on earnings management in family-controlled companies. This issue is particularly interesting as such companies are susceptible to various types of agency concerns. It is the purpose of this study to shed light on the earnings management issue in family-controlled companies characterized by potentially lower board independence and a higher risk of collusion. In this study, board independence is estimated by two parameters: (1) proportion of independent directors on the board; and (2) lack of chief executive officer (CEO)–board chairman duality function.Our empirical results provide evidence that the impact of board independence on earnings management is indeed weaker in family-controlled companies. The same result also holds for the lack of CEO– board chairman duality function. Such effects become stronger in cases in which the CEO is a member of the controlling family. [ABSTRACT FROM PUBLISHER]

This study examines the possible economic impact of a firm's decision to switch its inventory costing to LIFO. The contradictory conclusions of previous studies may stem from their use of empirical research methods (e.g., the market model) with overly strong assumptions. The current study applies an alternative approach; it utilizes a research method which relies on two versions of the second degree stochastic dominance criterion: the standard second degree stochastic dominance and stochastic dominance with lending and borrowing. These criteria examine changes in stockholders' welfare by considering simultaneously risk and possible outcomes in a more general manner. They do not require the assumptions of the market model, nor do they necessitate the estimation of specific risk measures such as stock beta. The stochastic dominance approach is applied to a sample of firms that switched from FIFO to LIFO, and to a control group of firms that did not. The results do not support the hypothesis that stockholders' welfare is affected by corporate LIFO adoption. [ABSTRACT FROM AUTHOR]

The relevancy of changing prices in accounting for asset values for U.S. industries is explored. The analysis compares the economic value of assets with accounting-based valuations -- historical and current cost -- in an inflationary environment. A simulation is employed to estimate the magnitude of the errors of current cost and historical cost reporting. The results of the simulation indicate that where firms use sum-of-years-digits depreciation, current cost accounting is more accurate than historical cost accounting for all but 1 of the 32 asset classes tested. Where firms use straight-line depreciation, current cost accounting is more accurate for all classes of structures but not for all classes of equipment. For equipment under straight-line depreciation, the relative accuracy of current cost was directly related to the rate of inflation and inversely related to the rate of growth of asset outlays. [ABSTRACT FROM AUTHOR]

We examine whether the level of a firm's conditional conservatism affects investor disagreement around earnings announcement dates. Investor disagreement is relevant for its repercussions on stock market efficiency. However, the literature related to the effect of firms’ reporting policies on disagreement is scant. Prior research suggests that conservatism, by requiring higher verifiability of profits, constrains earnings overstatements and encourages more complete revelations of losses, thus improving the information environment. In this paper, we further hypothesize that these effects of conservatism enhance news credibility and decrease information asymmetry, particularly for bad news announcements. This results in a lower disagreement and improved interpretation of earnings news. We consistently find that conservatism measures are negatively associated with proxies of announcement-time investor disagreement and that this effect is stronger when the firm is reporting bad news. Additional analyses indicate that the impact of conservatism is stronger when market surprise to the announcement is greater, while it is weaker in the presence of frequent and precise voluntary disclosure that preempts the earnings announcement. Finally, we show that a higher percentage of institutional investors’ ownership and a higher level of commitment to conservatism reinforce the impact of the latter. [ABSTRACT FROM AUTHOR]