Continuous Signaling Within Partitions: Capital Structure and the FIFO/LIFO Choice

Patricia J. Hughes, Eduardo S. Schwartz and Anjan Thakor ()
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Patricia J. Hughes: University of Southern California
Eduardo S. Schwartz: University of California, Los Angeles

Finance from University Library of Munich, Germany

Abstract: This paper considers a setting in which managers have private information about the values of their firms and can communicate it to uninformed investors through the use of two signals: capital structure and inventory accounting method. We show conditions under which a separating equilibrium with debt alone does not exist. The two-signal equilibrium involves a partitioned separation in which the highest quality firms choose FIFO and the lower quality firms choose LIFO, and all firms then distinguish themselves with these two partitions through capital structure choices. The analysis helps to explain the many observed empirical regularities about firms' capital structure choices and LIFO/FIFO choices and, in addition, produces numerous testable predictions about the relation between capital structure and inventory accounting method.

JEL-codes: G (search for similar items in EconPapers)
Pages: 19 pages
Date: 2004-11-30
New Economics Papers: this item is included in nep-acc and nep-fin
Note: Type of Document - pdf; pages: 19
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0411054

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