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Tests of the impact of LIFO adoption on stockholders: A stochastic dominance approach

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  • JOSEPH AHARONY
  • SASSON BAR†YOSEF

Abstract

. This study examines the possible economic impact of a firm's decision to switch its inventory costing to LIFO. The contradictory conclusions of previous studies may stem from their use of empirical research methods (e.g., the market model) with overly strong assumptions. The current study applies an alternative approach; it utilizes a research method which relies on two versions of the second degree stochastic dominance criterion: the standard second degree stochastic dominance and stochastic dominance with lending and borrowing. These criteria examine changes in stockholders' welfare by considering simultaneously risk and possible outcomes in a more general manner. They do not require the assumptions of the market model, nor do they necessitate the estimation of specific risk measures such as stock beta. The stochastic dominance approach is applied to a sample of firms that switched from FIFO to LIFO, and to a control group of firms that did not. The results do not support the hypothesis that stockholders' welfare is affected by corporate LIFO adoption. Résumé. Cette étude examine les effets économiques possibles de la décision d'une firme, de changer sa méthode d'évaluation des stocks pour celle de l'épuisement à rebours (DEPS). Les conclusions contradictoires d'études antérieures peuvent découler de leur recours à des méthodes de recherche (e.g. le modèle de marché) empiriques comportant des hypothèses exagérées. La présente recherche applique une autre approche; elle utilise une méthode de recherche fondée sur deux versions du critère de dominance stochastique de deuxième degré: la dominance stochastique de deuxième degré fondamentale (de base) et la dominance stochastique avec possibilité de prêt et d'emprunt. Ces critères examinent les modifications à la richesse des actionnaires en envisageant simultanément le risque et les conséquences possibles d'une façon plus générale. Ils n'exigent pas les hypothèses du modèle de marché et ne nécessitent pas non plus l'estimation de mesures de risque systématique telles que le Beta du titre. L'approche de dominance stochastique est appliquée à un échantillon de sociétés ayant passé de l'épuisement successif (PEPS) à l'épuisement à rebours (DEPS), ainsi qu'à un groupe témoin de sociétés n'ayant pas changé de méthode. Les résultats ne confirment pas l'hypothèse que la richesse des actionnaires est affectée par l'adoption de la méthode de l'épuisement à rebours (DEPS).

Suggested Citation

  • Joseph Aharony & Sasson Bar†Yosef, 1987. "Tests of the impact of LIFO adoption on stockholders: A stochastic dominance approach," Contemporary Accounting Research, John Wiley & Sons, vol. 3(2), pages 430-444, March.
    • Handle: RePEc:wly:coacre:v:3:y:1987:i:2:p:430-444
    DOI: 10.1111/j.1911-3846.1987.tb00648.x
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    Cited by:

    1. Giona, Massimiliano & Eduardo Roman, H., 1992. "Fractional diffusion equation for transport phenomena in random media," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 185(1), pages 87-97.
    2. Barta, Štefan & Dieška, Peter, 1995. "A computer-simulation study of anomalous diffusion on percolating clusters near to the critical point," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 215(3), pages 251-260.
    3. Snarskii, A.A. & Buda, S.I., 1997. "Effective conductivity of nonlinear two-phase media near the percolation threshold," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 241(1), pages 350-354.
    4. Woon†Oh Jung, 1989. "Strategic choice of inventory accounting methods," Contemporary Accounting Research, John Wiley & Sons, vol. 6(1), pages 1-25, September.
    5. Aharony, Amnon & Harris, A.Brooks, 1994. "Superlocalization of wave functions on fractal networks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 205(1), pages 335-341.
    6. Aharony, Amnon & Entin-Wohlman, O. & Brooks Harris, A., 1993. "Was superlocalization observed on a fractal?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 200(1), pages 171-178.
    7. Bouchaud, J.P. & Georges, A., 1989. "The diffusion front on fractals and superlocalization from linear response requirements," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 157(1), pages 535-538.
    8. Meir, Yigal & Aharony, Amnon, 1989. "Viscous fingers on fractals," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 157(1), pages 524-528.
    9. Barta, Štefan, 1994. "Anomalous diffusion on percolating clusters," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 203(2), pages 163-174.
    10. Bourbonnais, Roch & Benoît, Alain & Maynard, Roger, 1989. "Computer simulation of localization effects on Euclidean and fractal lattices," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 157(1), pages 37-41.

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