The Stock Market Reaction to the Allowance of Lifo for Tax Purposes
40 Pages Posted: 31 Jul 1995
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.
JEL Classification: G14, H25, M41, N22
Suggested Citation: Suggested Citation