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Free cash flow, debt-monitoring and managers' LIFO/FIFO policy choice
journal contribution
posted on 2001-12-01, 00:00 authored by Ferdinand GulThis paper explores the explanatory power of Jensen’s free cash flow hypothesis in managers’ choice of LIFO versus FIFO. The association between FCF, and choice of inventory methods is based on the assumption that there is a potential conflict of interest between managers and shareholders when LIFO is the tax minimization method and that non-value-maximizing managers of firms with the FCF problem have incentives to choose FIFO, an income increasing method, in order to increase their compensation. However, since debt can act as a monitoring device and mitigate the agency problems of FCF, managers of firms with high FCF and high debt are less likely to choose FIFO than managers of firms with high FCF and low debt. The evidence is consistent with this expectation.
History
Journal
Journal of corporate financeVolume
7Issue
4Pagination
475 - 492Publisher
ElsevierLocation
Amsterdam, The NetherlandsPublisher DOI
ISSN
0929-1199Language
engPublication classification
C1.1 Refereed article in a scholarly journal; C Journal articleCopyright notice
2001, ElsevierUsage metrics
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