The Stock Market Reaction to the Allowance of LIFO for Tax Purposes

Abstract:     
I investigate the stock market response to the allowance of LIFO for tax purposes. I structure the analysis as an event study of the Revenue Acts of 1938 and 1939. Accordingly I can examine market behavior in a way that is less subject to the potential confounding of self-selection which characterizes most LIFO adoption studies. I observe a reliably positive market reaction to the incorporation of LIFO into the tax code and the most significant effects are for firms having the largest estimated LIFO tax benefits. I conclude the market revised its probabilities that at least some firms would avail themselves of the opportunity to use LIFO and defer taxes on inventory profits.

Number of Pages in PDF File: 40

JEL Classification: G14, H25, M41, N22

working papers series