Open AccessLower taxes or higher executive bonuses: How inventory valuation choices best exhibit us corporate governance failings
Author(s) -
Kevin A. Diehl
Publication year - 2012
Publication title -
journal of governance and regulation
Language(s) - English
Resource type - Journals
eISSN - 2306-6784
pISSN - 2220-9352
DOI - 10.22495/jgr_v1_i2_p7
Subject(s) - fifo and lifo accounting , inventory valuation , valuation (finance) , earnings , business , economics , stock (firearms) , actuarial science , accounting , fifo (computing and electronics) , mechanical engineering , computer science , computer hardware , engineering
This research seeks to update and finally determine for the Fortune 500 whether the market values the inventory valuation choice of last-in, first-out (LIFO) over first-in, first-out (FIFO) as some signal of reporting and management quality. The market can adjust LIFO earnings to FIFO earnings. Thus, the only issue then is that companies choosing FIFO pay higher taxes, which shareowners should disfavor. Indeed, only 20 percent of the Fortune 500 utilize LIFO to value any inventory. However, after Spearman correlations and logistic regression, the research statistically significantly shows that investors are willing to give premiums on the price of stock for the choice of LIFO. Thus, companies should choose LIFO to reduce taxes and increase their stock prices.