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.
Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
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