I investigate stock price behavior associated with the allowance of LIFO for tax purposes. The analysis is structured as an event study of the Revenue Acts of 1938 and 1939. The results indicate a positive net market reaction to legislative events leading to LIFO's incorporation into the US tax code for the sample firms having the largest estimated LIFO tax benefits. I conclude the market revised its probabilities that firms most likely to benefit would avail themselves of the opportunity to use LIFO and defer taxes on inventory profits.

Earnings announcements, Informational content, Disclosures, Disclosure quality

[The inability to estimate stockholder wealth effect magnitudes and hence disentangle them from changes in the stock market's assessment of the probability that a regulatory change will occur has hampered previous research in the economic consequences of accounting choices. This study measures cash flow effects independent of stock market behavior and thereby permits evidence of significant abnormal return behavior to be used to infer changes in the market's probability assessment of the imposition of a regulatory change. The study uses a seemingly unrelated regressions approach to investigate information events surrounding the issuance of IRS Revenue Procedure 80-55. Issued in late 1980, this rule stated that banks could no longer deduct interest paid on governmental time deposits collateralized by tax-exempt securities. Further, it was to be applied retroactively; and for firms in the sample used in this study, the average estimated tax liability caused by the retroactive provision was $24.2 million, or 5.6 percent of the market value of common stock. In addition to contributing to the economic consequences literature, this study also demonstrates the potential usefulness of capital market data in estimating the magnitude of probability revisions associated with IRS actions. Presumably such evidence is a relevant input in the social choice problem of whether an IRS action has imposed a "substantial impact" on affected parties.]

We investigate (1) whether the variation in accounting standards across national boundaries relative to International Accounting Standards (IAS) has an impact on the ability of financial analysts to forecast non‐U.S. firms’ earnings accurately, and (2) whether analyst forecast accuracy changes after firms adopt IAS. IAS are a set of financial reporting policies that typically require increased disclosure and restrict management’s choices of measurement methods relative to the accounting standards of our sample firms’ countries of domicile. We develop indexes of differences in countries’ accounting disclosure and measurement policies relative to IAS, and document that greater differences in accounting standards relative to IAS are significantly and positively associated with the absolute value of analyst earnings forecast errors. Further, we show that analyst forecast accuracy improves after firms adopt IAS. More specifically, after controlling for changes in the market value of equity, changes in analyst following, and changes in the number of news reports, we find that the convergence in firms’ accounting policies brought about by adopting IAS is positively associated with the reduction in analyst forecast errors.

Inventory accounting method, LIFO, FIFO, Tax savings

The inability to estimate stockholder wealth effect magnitudes and hence disentangle them from changes in the stock market's assessment of the probability that a regulatory change will occur has hampered previous research in the economic consequences of accounting choices. This study measures cash flow effects independent of stock market behavior and thereby permits evidence of significant abnormal return behavior to be used to infer changes in the market's probability assessment of the imposition of a regulatory change, The study uses a seemingly unrelated regressions approach to investigate information events surrounding the issuance of IRS Revenue Procedure 80-55, Issued in late 1980, this rule stated that banks could no longer deduct interest paid on governmental time deposits collateralized by tax-exempt securities. Further, it was to be applied retroactively; and for firms in the sample used in this study, the average estimated tax liability caused by the retroactive provision was $24.2 million, or 5.6 percent of the market value of common stock. In addition to contributing to the economic consequences literature, this study also demonstrates the potential usefulness of capital market data in estimating the magnitude of probability revisions associated with IRS actions. Presumably such evidence is a relevant input in the social choice problem of whether an IRS action has imposed a "substantial impact" on affected parties.

This research investigates whether oil and gas producing firms use abnormal accruals and hedging with derivatives as substitutes to manage earnings volatility. Firms engaged in oil exploration and drilling are exposed to two kinds of risks that can cause earnings volatility: oil price risk and exploration risk. Firms can use abnormal accrual choices and/or derivatives to reduce earnings volatility caused by oil price risk, but cannot directly hedge the operational risk of unsuccessful drilling. Because hedging and using abnormal accruals are costly activities, and because prior research suggests managers do not eliminate all volatility (Haushalter 2000; Barton 2001), we expect that, at the margin, managers will use these smoothing mechanisms as substitutes to manage earnings volatility. Our results suggest a sequential process whereby managers of oil and gas producing firms first determine the extent to which they will use derivatives to hedge oil price risk, and then, especially in the fourth quarter, manage residual earnings volatility by trading off abnormal accruals and hedging with derivatives to smooth income.

We assess the usefulness of deferred tax expense in detecting earnings management. Assuming greater discretion under GAAP than under tax rules, and assuming managers exploit such discretion to manage income upward primarily in ways that do not affect current taxable income, then such earnings management will generate book-tax differences that increase deferred tax expense. Our results provide evidence consistent with deferred tax expense generally being incrementally useful beyond total accruals and abnormal accruals derived from two Jones-type models in detecting earnings management to avoid an earnings decline and to avoid a loss. Only total accruals is incrementally useful in detecting earnings management to meet analysts' earnings forecasts. Deferred tax expense is more accurate than the accrual measures in classifying firm-years as successfully avoiding a loss, whereas no one measure is more accurate in classifying firm-years as avoiding an earnings decline or meeting analysts' forecasts.

This study investigates the financial and operational implications of enterprise systems (ESs) in corporate risk management. Using matched difference‐in‐differences analyses based on ES implementation events, we document a significant reduction in the volatility of operating cash flows following ES implementations. We further show that ES implementers have better post‐implementation operational efficiency than matched non‐ES firms and better manage sales, costs of sales, working capital, and operating expenses to reduce operating cash flow volatility. Consistent with the benefits of lower cash flow volatility documented in prior literature, we find ES implementers demonstrate higher investment efficiency, lower reliance on external financing, and higher debt capacity post‐ES‐implementation than the matched non‐ES firms. Our study sheds light on the economic benefits of utilizing ESs in corporate risk management and in so doing responds to the paucity of empirical research in this area.

We find evidence that investors misprice information contained in book-tax differences (BTDs), measured as the ratio of taxable income to book income, TI/BI. Low TI/BI predicts worse earnings growth and abnormal stock returns than high TI/BI. We find that short sellers and insiders arbitrage BTD mispricing, but the arbitrage is imperfect because of constraints on short selling and insider trading. Under SFAS No. 109 the predictability is stronger for TEMP/BI, the temporary component of TI/BI, which reflects greater managerial discretion. The results are incremental to a large set of known accruals-based anomaly predictors. We suggest that a sunshine policy of disclosing a reconciliation of book and taxable incomes can reduce mispricing of BTDs and improve capital market resource allocation. Data Availability: Data are obtained from the public sources as indicated in the text.