The valuation effect of LIFO’s repeal on high pricing power firms

Abstract

Purpose – The aim of the study is to provides a timely examination of the valuation effect of current initiatives to repeal LIFO by analyzing the valuation impact of the potential repeal of LIFO conditional on the pricing power of the firm. Design/methodology/approach – Using the methodology from prior research for all LIFO companies, we use price levels regressions to empirically test the potential tax effect of LIFO’s repeal on the value of the firm. To evaluate the robustness of these results, we also use event study methodology to estimate abnormal returns around the House Bill H. R. 3970. Findings – Results show a favorable (unfavorable) valuation effect for high (low) pricing power firms that are able (unable) to recover tax payments by reducing costs and/or charging higher prices. These findings are robust to alternative measures of valuation (price and returns), as well as long and short event windows and suggest that certain firms may be able to offset post-LIFO repeal increased tax payments by increasing sales-output prices and or decreasing cost-input prices. Originality/value – The primary contribution of this paper is to provide relevant and new empirical evidence regarding the potential valuation effects of the currently proposed political and regulatory initiatives to abolish LIFO.