The Taxable and Book Income Motivations for a LIFO Layer Liquidation

Abstract

This study examines the potential determinants of LIFO liquidations using a multivariate tobit model.1 Unlike the univariate analysis used in prior LIFO liquidation studies (e.g., Davis, Kahn, and Rozen [1984] and Tse [1990]), our multivariate analysis takes into account both the correlations among these potential determinants and the magnitude of LIFO liquidations. Simple correlation analysis indicates that the sales changes and earnings changes of LIFO liquidation firms are highly correlated. Thus, while univariate support for both the declining-sales and declining-earnings explanations of LIFO liquidations could indicate that both explanations are correct, it could also be the case that support for either explanation stems from the high correlation between sales changes and earnings changes. Our multivariate approach helps avoid such ambiguities in interpretation and supports two conclusions. First,