LIFO Adoption by Industry

Abstract

Prior studies have shown the cluster of Last-In-First-Out (LIFO) adoptions by firms in the same industry. However, it is not clear which factors affect the variation in the use of LIFO among different industries. In this paper, we uses proxies representing different aspects of industries' production/investment opportunity set in an effort to gain insight regarding the variation in the use of LIFO among diverse industries. Among all industry-specific variables, we find that industry-average effective tax rate (both GAAP ETR and cash ETR) significantly affect the tendency of adopting LIFO in industry level. We further find that firms in industry with lower inventory turnover rate and increasing price level are more likely to apply LIFO. In addition, because IFRS prohibit firms from using LIFO on their inventory valuation, we find that firms in the industry with more global business are less likely to use LIFO. Lastly, consistent with positive theory, we find evidence suggesting that firms in industry with higher leverage ratio are less likely to adopt LIFO while firms in industry that rely heavily on CEO compensation are more likely to adopt LIFO.