Continuous Signaling within Partitions: Capital Structure and the FIFO/LIFO Choice

Hughes, Patricia J.; Thakor, Anjan V.

doi:10.1177/0148558x9400900101

Cited by 5 publications

(3 citation statements)

References 23 publications

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“…6 6 The existence of separating equilibria can easily be shown, where high (low) quality firms choose the earnings minimizing (maximizing) accounting policy. The proof, which is available upon request, generalizes existing results from the dichotomous LIFO/FIFO case (Hughes et al, 1994). …”

supporting

confidence: 59%

Managing Earnings with Intercorporate Investments

Bøhren

Haug

2006

Business Fin & Account

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We explore to what extent firms deliberately manage their financial reports by exploiting the flexibility of generally accepted accounting principles. Using a sample of Oslo Stock Exchange-listed firms with 20-50% equity holdings in other firms, we find that firms with high financial leverage tend to maximize reported earnings from these investments through their choice between the cost method and the equity method, possibly in an attempt to reduce debt renegotiation costs or to avoid regulatory attention. In contrast, managers do not systematically bias reported earnings to extract private benefits or to signal revised expectations about future cash flows. Firms use different earnings management tools in a consistent way, as the earnings effect of the cost/equity choice is not offset by discretionary accruals. Copyright 2006 The Authors Journal compilation (c) 2006 Blackwell Publishing Ltd.

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confidence: 59%

Managing Earnings with Intercorporate Investments

Bøhren

Haug

2006

Business Fin & Account

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“…Some earlier analytical work(Hughes et al 1988(Hughes et al , 1994 suggests that firms that choose FIFO might forego the benefit of switching to LIFO (if any) to provide a signal of superior performance to investors. However in this study, we do not examine the effect of inventory choice on performance.…”

mentioning

confidence: 99%

Inventory policy, accruals quality and information risk

Krishnan

Srinidhi

2008

Rev Acc Stud

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This paper provides evidence consistent with firms with Last-in-first-out (LIFO) inventory policy being priced by the market as having lower information risk than First-in-first-out (FIFO) firms. Furthermore, the paper shows that this pricing differential is sustained after controlling for accruals quality, suggesting that the inventory policy signals some information risk characteristics that are not captured by accruals quality measure. We investigate the relation between inventory policy and accruals quality and find that accruals quality is systematically worse for FIFO firms than for LIFO firms after controlling for correlated omitted variables and known firm attributes. These findings complement the currently established relationship between the cost of capital, market pricing and accruals quality by focusing on the need for understanding the incremental effects of individual accounting policies

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“…First, the economic consequences of alternative accounting policies, and second, the role of the accounting standard setter in ensuring the provision of useful information contained in financial statements. From the perspective, of the former the literature indicates that firms use alternative accounting policies as a quality-signalling mechanism to the users of financial reports (Hand & Skantz, 1997;Hughes, Schwartz & Thakor, 1994). The objective of the quality-signalling is to influence users in their investment decision making process.…”

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Determinants of the Choice of Reporting the Direct Method or Indirect Method of Cash Flow from Operating Activities: Malaysian Evidence

Hassan¹,

Christopher²

2007

Journal of Financial Reporting and Accounting

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This study examines the incentives motivating listed companies in Malaysia to voluntarily choose the Direct Method over the Indirect Method in reporting cash flow from operating (CFO) activities in their 1997 annual financial reports following the adoption of the IAS 7 (Revised) Statement of Cash Flows (SCF), which was used prior to the current standard MASB No. 5 Cash Flow Statement promulgated by the Malaysian Accounting Standards Board (MASB) in 1999. Adopting the signalling perspective, the general hypothesis of this study is that the choice of the Direct Method over the Indirect Method in reporting CFO activities is to maximize a firm's value via engagement in quality signalling to the market. Specifically, it is hypothesised that such decision is influenced by the firm's level of managerial efficiency, financial risk, size, its auditor, and industry membership. The sample consists of 231 firms listed on the Kuala Lumpur Stock Exchange; 32 firms in the treatment group (Direct Method) and 199 firms in the control group (Indirect Method). Based on the results from the univariate and multivariate analyses, we found all variables to be in the hypothesised directions. However, we infer that the decision to choose the Direct Method for reporting CFO activities in SCF is significantly influenced by the firm's level of managerial efficiency, size, and its auditor. Thus, there is support for the general hypothesis of maximization of the value of the firm via quality signalling.

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Continuous Signaling within Partitions: Capital Structure and the FIFO/LIFO Choice

Abstract: This paper considers a setting in which managers

Cited by 5 publications

References 23 publications

Managing Earnings with Intercorporate Investments

Managing Earnings with Intercorporate Investments

Inventory policy, accruals quality and information risk

Determinants of the Choice of Reporting the Direct Method or Indirect Method of Cash Flow from Operating Activities: Malaysian Evidence

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