Incentives for fixed asset revaluations: The UK evidence

Abstract

Purpose - The purpose of this paper is to examine the incentives for fixed asset revaluation. The motives that are investigated include firm size, fixed asset intensity, firm foreign operations and acquisitions, firm indebtedness and earnings management inclination. Design/methodology - The study utilises logistic and linear regressions to test the hypothetical relations set up in the study. The categorisation of sample companies into those that perform asset revaluations and those that do not is based on the examination of firms' annual reports. Findings - The findings of the study provide evidence that firm size is positively related to fixed asset revaluation. Firms with foreign operations, with low fixed assets, and with high debt capital needs are more likely to perform fixed asset revaluations. This is also the case for firms that carry out acquisitions. The study also shows that fixed asset revaluation is negatively related to earnings management. Research limitations/implications - Firms that revalue their fixed assets should examine the signals that are likely to be conveyed to investors about their managerial ability and financial prospects. Firms would tend to revalue their fixed assets when it is likely to result in maximum favourable financial consequences. Future research should investigate the possible opportunism in firms' behaviour, as well as the stock market reaction to fixed asset revaluations. Originality/value - The paper is useful for investors and financial analysts, as it sheds light on the motives for fixed asset revaluations. The reporting of asset values based on fair values would assist them in making unbiased predictions about firms' future performance. The paper gives insight about the financial attributes of firms that perform fixed asset revaluations. For example, firms with capital needs would be inclined to undertake a fixed asset revaluation in order to reinforce their financial position. Copyright © 2012 Emerald Group Publishing Limited. All rights reserved.