Fixed asset revaluation: management incentives and market reactions

Abstract

There is a lack of relevant research of fixed assets revaluation practices in New Zealand. This study provides some insights as (1) why some New Zealand firms choose to revalue their fixed assets; (2) when will a firm revalue its fixed assets; and (3) whether fixed asset revaluation provides information to investors. This research attempts to explain the motivations of the management’s fixed asset revaluation decision in New Zealand. The empirical analysis includes five common explanatory variables, such as gearing (debt-equity ratio), liquidity, market-to-book ratio, firm size, and fixed asset intensity. In addition, the relationship between asset revaluation and share price movements of the firms are examined to determine the perceived usefulness of fixed asset revaluation information for the capital market in New Zealand.

The study results show that fixed asset intensity and firm size significantly contribute to the revaluation decision. In contrast to the findings of previous studies (Whittred and Chan, 1992; Brown, Izan, and Loh, 1992; and Missionier-Piera, 2007), the level of corporate gearing is negatively related to the probability of revaluing assets for the sample of New Zealand firms in this study. However, the effect of the level of gearing on the revaluation decision is insignificant. The empirical results did not show any significant outcomes and relationships for investigated year 1998. This is because 1998 signified the end of recession and the beginning of economic growth in New Zealand. At the end of a recession, the changes in the country’s economic environment might have superseded individual firms’ considerations in management decision making process.

The empirical results show that the practice of revaluation increased sharply with the adoption of the IFRS in 2005 in New Zealand. About 28.1% of the revaluation announcements under study were made in 2005 compared to just over 15.8% in 2001. Furthermore, the empirical results show negative returns accrue to firms prior to the publication of financial statements that carry revaluation announcements. These negative returns are reverted as soon as the revaluation information is made public. These gains are again maintained for at least a month after the announcements are made. Comparing frequent revaluers to first time revaluers, the results show that asset revaluation information is relevant to investors. Frequent revaluers gained only 0.8% announcement abnormal returns while First time revaluers gained over 4% in the 2005.