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

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

Finance from EconWPA

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)
New Economics Papers: this item is included in nep-acc and nep-fin
Date: 2004-11-30
Note: Type of Document - pdf; pages: 19
View list of references View citations in EconPapers

Downloads: (external link)
http://129.3.20.41/eps/fin/papers/0411/0411054.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0411054

Access Statistics for this paper

More papers in Finance from EconWPA
Series data maintained by EconWPA ().