A test of the firm characteristics hypothesis for LIFO choice of Canadian firms

This paper examines whether characteristics of Canadian firms can explain the observed difference in the use of LIFO for valuing inventory between the U.S. and Canada. Characteristics that help explain the choice between LIFO and FIFO use in the U.S. are used to compare Canadian firms to U.S. LIFO users and FIFO users separately. If Canadian firms are characteristically similar to U.S. FIFO users, then the firm characteristics hypothesis would be supported and LIFO would be infrequently used in Canada because few firms are LIFO-like in their underlying characteristics. Univariate nonparametric tests are used to compare U.S. and Canadian firms in the same industries on both an unmatched and matched basis. The results of this comparison indicate that Canadian average cost firms have more characteristics in common with U.S. LIFO users than FIFO users and Canadian FIFO firms have characteristics like both U.S. FIFO and U.S. LIFO firms. Logit models were estimated using the U.S. firms. These models predict that between three and 28% of Canadian firms would use LIFO. Thus, the firm characteristics explanation for infrequent use of LIFO in Canada is not supported by the data. These results imply that several Canadian firms may use LIFO if the institutional setting in Canada was more like that in the U.S.