JIT Adoption: The Effects of LIFO Reserves and Financial Reporting and Tax Incentives

Abstract:     
Using matched samples of JIT adopters and non-adopters, we examine the association of JIT adoption with firms' financial reporting and tax incentives, earnings management histories, and LIFO reserve levels. We find evidence that adoption decisions are influenced by the interaction of firms' LIFO reserves with their income smoothing, debt covenant, and tax incentives. We also find that adoption is less likely for firms historically engaging in high degrees of earnings management, particularly when such firms have no substantial LIFO reserves. Our study extends earlier research demonstrating a relation between inventory valuation method and year-end inventory transactions, and documents a relation between earnings management incentives and a fundamental supply chain design choice.

Keywords: Earnings management, Just-In-Time, LIFO reserves, LIFO liquidations

JEL Classification: M11, M40, M41, M43, M46

Accepted Paper Series