Contents

Demand for fair value accounting: The case of the asset revaluation boom in Korea during the global financial crisis

Yoo, Choong-Yuel / Choi, Tae Hee / Pae, Jinhan

Abstract

When the fair value accounting (FVA) option for property, plant, and equipment was introduced in the midst of the global financial crisis, a significant proportion of Korean firms elected FVA. We attribute this unusual boom in asset revaluations to the nation's culture of government intervention and civilian compliance, which was particularly espoused during this period of financial turmoil, and a foreseeable option to switch back to historical cost accounting. We find that among those firms whose debt-to-equity ratios are low, public firms opt for the FVA option more often than private firms, suggesting that the need to communicate fair value information with diversified equity holders is more important than the need to do so with creditors. In contrast, among those firms whose debt-to-equity ratios are high enough to warrant such unfavorable dispositions as new debt freezes and monitoring by regulators, we find no difference in the FVA choice between private and public firms. These findings imply that during the global financial crisis, private firms that rely heavily on debt financing have a strong incentive to utilize FVA to comply with government guidelines for the debt-to-equity ratio and to ease a potential hold-up problem by influential creditors.

Issue Date
2018-01
Publisher
WILEY
Keywords
PRIVATE FIRMS; EARNINGS MANAGEMENT; PUBLIC FIRMS; QUALITY; CHOICE; INCENTIVES; MOTIVES; IFRS
Citation
JOURNAL OF BUSINESS FINANCE & ACCOUNTING, v.45, no.1-2, pp.92 - 114, 2018
DOI
10.1111/jbfa.12266
Journal Title
JOURNAL OF BUSINESS FINANCE & ACCOUNTING
Start Page
92
End Page
114
ISSN
0306-686X
Language
English
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