Title

Inventory policy, accruals quality and information risk

Document Type

Journal article

Source Publication

Review of Accounting Studies

Publication Date

9-1-2008

Volume

13

Issue

2/3

First Page

369

Last Page

410

Publisher

Springer Science+Business Media, LLC.

Keywords

Accruals quality, Asset pricing, Cost of capital, Information risk, Inventory

Abstract

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.

DOI

10.1007/s11142-008-9067-2

Print ISSN

13806653

E-ISSN

15737136

Publisher Statement

Copyright © 2008 Springer Science+Business Media, LLC.

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Full-text Version

Publisher’s Version

Recommended Citation

Krishnan, G. V., Srinidhi, B., & Su, L. (2008). Inventory policy, accruals quality and information risk. Review of Accounting Studies, 13(2/3), 369-410. doi: 10.1007/s11142-008-9067-2