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Dividend behavior surrounding LIFO adoption

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  • Michael Ettredge
  • Jeong Youn Kim

Abstract

This study investigates the influence of LIFO adoption on changes in cash dividends. Descriptive studies of dividend policy have found that changes in cash dividends are positively associated with both operating cash flows and accounting earnings. LIFO adoption is interesting because it typically decreases earnings while increasing cash flows through deferral of U.S. taxes. We regress changes in annual cash dividends against a proxy for the earnings effect and the cash flow effect of LIFO usage, as well as additional control variables. The model is estimated for each of five years, centered on the adoption year, using a sample of 361 LIFO adopters. The results suggest that adoption year changes in cash dividends are associated with the negative earnings effect rather than the positive cash flow effect of LIFO adoption.

Suggested Citation

  • Michael Ettredge & Jeong Youn Kim, 1994. "Dividend behavior surrounding LIFO adoption," Review of Financial Economics, John Wiley & Sons, vol. 4(1), pages 39-53, September.
  • Handle: RePEc:wly:revfec:v:4:y:1994:i:1:p:39-53
    DOI: 10.1016/1058-3300(94)90004-3
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