There has been a vast empirical literature examining the reactions of investors to a firm's switch from the first-in, first-out (FIFO) to the last-in, first-out (LIFO) method of valuing inventory, beginning with Sunder [1973] and continuing through Dopuch and Pincus [1988]. This discretionary accounting change has captured the interests of researchers because of the direct effect on the firm's cash flows and presumably also on the firm's value. This body of empirical results has raised several conundrums which question both the rationality of the market response and the economic motivation of managers. Lev and Ohlson [1982] review the empirical studies and conclude that the results subsequent to Sunder [1973] showing a negative market reaction are disturbing. The conundrums are first, that a large number of firms continue to use FIFO, foregoing billions of dollars in tax savings;' second, that firms which switch to LIFO appear to do so slowly;2 and third, that LIFO adoptions may be accompanied by either a positive or a negative stock price change.