LIFO Liquidations and Earnings Thresholds

This study investigates the use of LIFO liquidations to meet or beat earnings benchmarks. We find that the likelihood of a liquidation is higher for firms that would otherwise miss the consensus forecast than for firms that are already beating the consensus forecast. This result is incremental to controlling for the tax costs of liquidation and other factors predicted to partially explain managers’ inventory liquidation decisions.. The market response to unexpected earnings arising from liquidation gains is negative, relative to the overall response to unexpected earnings. However, the liquidation gain is positively associated with the announcement period return for firms that appear to have used the liquidation to beat earnings benchmarks. In contrast, firms that liquidated earnings for non-benchmark related reasons have no significant market response to the liquidation gain. One explanation for this result is that liquidations to beat benchmarks have less negative implications for future sales and profitability.