Using matched samples of JIT adopters and nonadopters, we examine the association of JIT adoption with firms' financial reporting and tax incentives, earnings‐management histories, and LIFO reserve levels. We find evidence that adoption decisions are influenced by the interaction of firms' LIFO reserves with their income smoothing, debt covenant, and tax incentives. We also find that adoption is less likely for firms historically engaging in high degrees of earnings management, particularly when such firms have no substantial LIFO reserves. Our study extends earlier research demonstrating a relation between inventory valuation method and year‐end inventory transactions, and documents a relation between earnings‐management incentives and a fundamental supply‐chain design choice.
Empirical research provides scant evidence that just-in-time (JIT) adopters outperform their non-adopting industry peers. Using a sample of 201 JIT adopters and matched non-adopters, we examine the relation between financial performance and JIT. Our sample-wide results indicate that JIT adopters improve financial performance relative to non-adopters, and that profit margin, rather than asset turnover, is the primary source of such improvement. However, results of additional analyses suggest that JIT adopters below a firm-size threshold do not improve financial performance, a finding that reconciles our study to Balakrishnan et al. (1996), which examined a JIT adopter sample that included a greater proportion of small firms.