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).

Bar-Yosef, Sasson, and Richard Kolodny, Policy and Capital Market Theory, this REVIEW 58 (May 1976), 181-190. Black, Fischer, Michael C. Jensen, and Myron Scholes, The Capital Asset Pricing Model: Some Empirical Tests, in Michael C. Jensen (ed), Studies in the Theory of Capital Markets (New York: Praeger Publishers, Inc., 1972), 79-121. Black, Fischer, and Myron Scholes, The Effects of Dividend Yield and Dividend Policy on Common Stock Prices and Returns, Journal of Financial Economics 1 (Jan. 1974), 1-22. Fama, Eugene F., and Harvey Babiak, Policy: An Empirical Analysis, Journal of the American Statistical Association 63 (Dec. 1968), 1132-1161. Fama, Eugene F., and James D. MacBeth, Return, and Equilibrium: Empirical Tests, Journal of Political Economy 81 (May-June 1973), 607-636. Lintner, John, Distribution of Incomes of Corporations among Dividends, Retained Earnings and Taxes, American Economic Review 46 (May 1956), 97-113. Miller, Merton H., and Franco Modigliani, Policy, Growth, and the Valuation of Shares, Journal of Business 34 (Oct. 1961), 411-433. Miller, Merton H., and Myron Scholes, Rates of Return in Relation to Risk: Re-examination of Some Recent Findings, in Michael C. Jensen (ed), Studies in the Theory of Capital Markets (New York: Praeger Publishers, Inc., 1972), 47-78. Pettit, R. Richardson, and Randolph Westerfield, A Model of Capital Asset Risk, Journal of Financial and Quantitative Analysis 7 (Mar. 1972), 1649-1668.

THE reaction of investors to the dividend policy of the firm has received considerable attention during the last two decades. During this period two principal schools of thought emerged. The first, led by Myron Gordon (1959, 1962), suggested that dividend policy is relevant to security valuation; the second, led by Modigliani and Miller (1961), suggested that it is not. Although the lines between these two positions were drawn more than ten years ago, the issue concerning dividend relevance remains unresolved today.' The reason for the long duration of the controversy is the lack of unambiguous empirical evidence which strongly supports either of the two schools.2 During the last decade the research on capital markets conducted by Sharpe (1964), Lintner (1965), and Mossin (1966) brought to the field of finance the Capital Asset Pricing Model (hereafter, CAPM). This valuation model has provided the basis for a significant number of empirical studies ranging from the value of added disclosure requirements to the benefits of corporate mergers.3 Although it is customary in these studies to state the assumptions under which the CAPM was developed, the use of the model itself assumes implicitly that the degree to which the assumptions abstract from reality does not impair the model's usefulness as a testing device. One of the inherent assumptions in the use of CAPM concerns dividend policy. In this regard, using the CAPM implicitly assumes the irrelevance hypothesis indicating a strong tendency among scholars to accept the irrelevance position. The argument for this position initially spelled out by Modigliani and Miller (1958) is demonstrated through an analysis of (1) the rationality of the behavior of stockholders, and (2) market forces. It suggests that, as long as a firm's investment decisions are known, the capital market will evaluate the firm's shares according to its potential profitability. If certain shareholders prefer more cash income than dividends paid, they can obtain such by liquidating part of their stock holdings. Doing this, these investors would realize the same return as those who maintain their original stock holdings regardless of the firm's dividend policy.4 Contrary to this, the relevance school suggests that a payment of cash dividends by the firm to its shareholders has a significant impact on the valuation of its securities.5 The arguments set forth in support of this position vary from the informational content of dividends to the clientele effect and return prospects on retained earnings.6 The purpose of this paper is to present the results of a theoretical and empirical investigation of the dividend issue and to examine the implications of the findings in light of recent developments in capital market theory. The results of this study indicate, contrary to other recent studies,7 that investors do in fact have a net preference for dividends and, consequently, the practical use of the capital asset pricing model, which implicitly assumes investor indifference between returns in the form

This paper introduces a new method to measure the unexpected component of dividend announcements. While measures used previously were based on various arbitrary models of dividend expectations, the authors' suggested method compares the reaction of stock and option prices to dividend announcements. Their measure is compared to commonly used model-based measures, to a Box-Jenkins time-series-based measure, and to a Value-Line Investor Survey-based measure of dividend surprises. The new measure is more highly correlated with the market's reaction to the announcements than are alternative measures of dividend surprises. The new measure is also shown to be insensitive to the extent to which the options used to identify unexpected dividend announcements are in- or out-of-the-money.