Asset revaluations: motives and choice of items to revalue

Abstract

A recent revision of the local accounting standard for property, plant, and equipment (PP&E) has conferred Korean companies a revaluation option for PP&E without the early adoption of International Financial Reporting Standards, which will be mandatory in 2011. The stock market generally reacts favorably to the announcement of an asset revaluation. We examine the motives and characteristics of companies that revalue PP&E and their choice of assets for revaluation. First, we find that Korean companies are more likely to revalue PP&E to improve their financial position or reduce debt contracting costs rather than lessen political costs or signal better future prospects. Second, we report a pecking order in the choice of assets to revalue. Companies prefer land for revaluation to other depreciable assets. When companies select depreciable assets for revaluation, most of them revalue land at the same time suggesting that companies are likely to select depreciable assets for revaluation only after they select land. Third, we posit and find that revaluing companies are more likely to elect depreciable classes of PP&E when they are highly levered, experience equity depletion, and report losses. We also find that revaluing companies are more likely to recognize revaluation decrements in addition to increments when they are large and are revaluing depreciable classes of PP&E.