Retail Apocalypse? Maybe blame accounting. Investigating inventory valuation as a determinant of retail firm failure

Purpose The purpose of the study is to evaluate whether the selection of accounting method used to value inventory increases or decreases the probability of a retail firm's ability to remain in existence. Design/methodology/approach This study employs a binary logistic regression model to predict group membership and the probability of failure. The study utilizes an unbalanced sample of US publicly traded failed and functioning retail firms over a ten-year period. Findings The results clearly support the conclusion that there is a difference in the probability of retail firm failure with respect to the accounting method used to value inventory. Merchants using a cost-based valuation method were 2.3 times more likely to fail than firms using a price-based method. The results also affirm existing bankruptcy literature by finding that profitability, liquidity, leverage, capital investment and cash flow are factors in retail failures. Practical implications The results suggest that traditional merchants cannot simply blame e-commerce or shifts in demographics for the retail Apocalypse; good management and proper valuation of stock still matter. Originality/value This study is the first to look at firm failure in the retail sector after the great recession of 2008, in an era known as the “retail Apocalypse.” In addition, this study differs from other firm failure literature by incorporating cost- and price-based inventory valuation methods as a variable in firm failure.