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Journal of Accounting Research Vol.

36 Supplement 1998
Printed in U.S.A.

Revalued Financial, Tangible, and Intangible Assets: Associations with Share Prices and Non-Market-Based Value Estimates
MARY E. BARTH* AND GREG CLINCHf

1. Introduction
This study investigates whether relevance, reliability, and timeliness of Australian asset revaluations diflFer across types of assets, including investments, property, plant and equipment, and intangibles. We also investigate whether they differ if the valuation amount is determined by the firm's Board of Directors or an independent appraiser, for more versus less timely valuations, and for revalued amounts that are above or below historical cost.^ We base our inferences on the association between
Stanford University; fAustralian Graduate School of Management. We appreciate helpful comments and suggestions by workshop participants at the X'i'i?, Journal of Accounting Research Conference, the NYU Intangibles Research Conference, especially discussant Jon Low, Massey University, the University of Sydney, the University of Tasmania, the 1997 Australian Graduate School of Management Finance and Accounting Research Camp, and the 1997 American Accounting Association Financial Accounting and Reporting Section conference, especially discussants Mark Lang and Jim Leisenring, and an anonymous reviewer. We also appreciate the research assistance of Kazbi Kothavala and Kerry Pattenden and funding by the Class of 1969 Faculty Fellowship and Financial Research Initiative of the Stanford University Graduate School of Business, and New York University's Leonard N. Stern School of Business. We also thank IIBIEIS for permitting use of their analyst forecast data and New York University's Leonard N. Stern School of Business for enabling access to the IIBIEIS data. ' Throughout, we use the term "revaluations" to refer to recognized revalued amounts associated with assets that have been revalued. We use the phrase "current-year revaluations" to refer to revaluations made in the current year. 199 Copyright , Institute of Professional Accounting, 1999

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ENHANCING THE FINANCIAL REPORTING MODEL: 1998

the recognized amounts for various categories of revalued assets of Australian firms and share prices and a non-market-based estimate of firm value, which is based on analysts' earnings forecasts. Our evidence bears directly on revaluation practices under Australian GAAP. However, our evidence also bears indirectly on current issues facing the Financial Accounting Standards Board (FASB) in the United States. U.S. CAAP requires disclosure, and the FASB is considering requiring recognition, of fair values of all financial instruments. Currently, there is no U.S. proposal to disclose or recognize nonfinancial assets at fair value (FASB [1991; 1996]). Yet, fair values of all assets likely are relevant to financial statement users. One reason the FASB distinguishes financial and nonfinancial assets is the belief that fair values are not reliably estimable for nonfinancial assets, especially intangible assets and tangible assets whose value in use varies from exit or entry value (Barth and Landsman [1995]). Because Australian GAAP permits revaluing all long-lived assets at fair value (and many Australian firms do so), examining Australian revaluations by asset class permits us to test this belief. Also, Australian GAAP permits revaluations based on independent appraisers' or directors' value estimates, which may differ in reliability, and does not require revaluations every year, possibly affecting relevance and timeliness.2 We investigate all of these possibilities. Although revaluations of appreciated assets are discretionary under Australian GAAP, revaluations of impaired assets are required, as they are under U.S. GAAP However, determining whether a long-term asset is impaired and the amount of the impairment requires considerable judgment.^ The most notable change that would result from adopting fair value accounting for long-lived assets under U.S. GAAP is recognition of such assets at amounts in excess of depreciated historical cost. Australian firms afTord us an opportunity to provide evidence on this dimension of the fair value accounting debate. Specifically, we investigate whether revalued amounts in excess of historical cost are value relevant and investigate the relation between share returns and revaluations that would not be permitted under U.S. GAAP. * Our primary findings are based on estimating relations between share price, or a firm value estimate based on analysts' earnings forecasts, and operating earnings, book value of equity minus the book values for
2 Australian GAAP permits considerable discretion regarding asset revaluations, including whether and when to revalue upward appreciated assets. Thus, effects of discretion can affect our inferences. Although we interpret our findings with this possibility in mind, we leave to future research a comprehensive study of the effects of discretion. ^ Because of the diverse measurement and disclosure practices relating to asset impairment, the EASB issued Statement of Einancial Accounting Standards No. 121 (EASB [1995]) in

1995, which clarifies GAAPrelating to impairment of long-lived assets (see, e.g., SEAS No. 121 Basis for Conclusions). SEAS No. 121 became effective after our sample period. ^ By the term "value relevant," we mean that the amount has a significant relation in the predicted direction with share prices or the non-market-based estimate of firm value.

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the asset classes we investigate separately, and amounts recognized at cost and at revalued amounts for those asset classes. The sample comprises 350 publicly traded Australian firms for 1991 through 1995: the largest 100 firms and a random sample of 250 smaller firms. Because the relations we estimate likely difFer across industries, we present separate findings for firms in the nonfinancial, mining, and financial industries. Regarding asset class, we find that, as expected based on prior research on fair values of financial assets, revalued investments are consistently significantly associated with share prices, except for investments of nonfinancial firms in associated companies. We also find that revalued intangible assets are consistently significantly positively associated with share prices, contradicting the view that such estimates are unreliable. In fact, there is little evidence to indicate that investors distinguish recognized cost and revalued amounts for investments and intangible assets.^ The findings regarding revalued property, plant, and equipment (PPF) are less consistent. We find that revalued aggregate PPF is significantly positively associated with share prices for firms in all three industries. However, whereas revalued plant and equipment is value relevant for mining firms, it is insignificantly related to share prices for nonfinancial firms and significantly negatively related to share prices for financial firms. Revalued property is not significantly associated with share prices for any industry, although it is for nonbank financial firms. Regarding source of revaluation value estimates, we find little evidence indicating independent appraiser-based revaluation amounts are value relevant more often than director-based amounts. These findings suggest that the relevance of directors' private information about asset values can outweigh potential effects of directors' self-interest on the estimates. Regarding age of revaluations, we find that revalued intangible assets are value relevant regardless of age, and that investment revaluations from other than the current year are value relevant for nonfinancial firms. Surprisingly, revaluations of PPE more than three years old are value relevant more consistently than more timely revaluations. Taken together, these findings suggest that lack of revaluation timeliness does not eliminate the revalued amounts' relevance. Finding that revalued amounts are significantly associated with share prices suggests they have impUcations for firms' future profitability. As Bernard [1993] suggests, we investigate this directly by estimating the relation between the revalued amounts and a non-market-based estimate of firm value, based on the present value of analysts' forecasts of future earnings. Findings using this firm value estimate generally corroborate

^ Under Australian GAAP, investments are not recognized based on the equity method. Thus, investments that have not been revalued are recognized at cost. Our analysis does not consider the disclosed equity-method-based amounts because the disclosures do not identify whether they relate to revalued investments.

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those using share prices, increasing our confidence that revalued amounts reflect asset value estimates. We next estimate the relation between share returns and current-year revaluations, partitioned by whether the revaluation affects net income or is recognized directly in shareholders' equity. We find that aggregate revaluations recognized directly in earnings are significantly positively related to share returns for nonfinancial firms, but those recognized in equity are not. The reverse is true for mining and financial firms. Further analyses reveal that the positive earnings relation primarily is attributable to PPE and intangible asset revaluations, whereas the positive equity relation primarily is attributable to investments. We find little difference in the relation with returns for director- or independent appraiser-based revaluations. Relating to amounts not observed under U.S. GAAP, we first estimate the price specifications after partitioning revalued asset amounts into those stated above cost (not permitted under U.S. CAAP) and those stated below cost (required under U.S. GAAP). We find revalued amounts for investments and PPE generally are value relevant regardless of this partitioning; data limitations preclude conducting this analysis for intangible assets. Second, we find that upward revaluations recognized in equity are positively related to returns, although not significantly so for nonfinancial firms. However, revaluations recognized in earnings, regardless of sign, are negatively associated with returns, with the exception of downward revaluations for nonfinancial firms. Downward revaluations recognized in earnings, i.e., those required by Australian GAAP and U.S. GAAP, are significantly positively related to returns for nonfinancial firms. Our finding that upward revaluations recognized in earnings have a negative relation with returns suggests the market discounts discretionary earnings increases, because upward revaluations are discretionary. We find little difference between the returns findings for director- and independent appraiser-based revaluations. Finally, because our sample comprises firms of disparate size, we also estimate the price and returns regressions separately for two size-partitioned samples. We find little difference between them for revalued investments and intangible assets, but revalued PPE is more consistently value relevant for smaller nonfinancial and financial firms. Also, revaluations by smaller firms are somewhat more consistently significantly associated with returns than those of larger firms. Section 2 describes Australian GAAP for revaluations and reviews related research. Section 3 develops the estimation equations and section 4 describes the data and descriptive statistics. Sections 5 and 6 present findings from the price and non-market-based value estimate regressions and returns specifications, respectively. Section 7 presents findings from analyses aimed at differences between upward and downward revaluations, and section 8 presents findings from additional analyses, including those from size-partitioned samples. Section 9 provides a summary and concluding remarks.

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2. Australian GAAP for Revaluations and Related Research


2.1 AUSTRALIAN GAAP FOR REVALUATIONS

Australian GAAP (ASRB 1010 [1987], as amended by AASB 1010 [1993]) permits firms to revalue noncurrent assets upward when the asset's recoverable amount exceeds its carrying amount and requires firms to revalue noncurrent assets downward when the asset's recoverable amount falls below its carrying amount. The standard defines recoverable amount as the net amount expected to be recovered through net cash inflows arising from the asset's continued use and subsequent disposal.^ Asset revaluation increments can be recognized only if all assets in an asset class are revalued, i.e., selective upward revaluations are not permitted. However, revaluation decrements, when required, are permitted for individual assets. Revaluation increments are credited directly to an equity asset revaluation reserve, unless the increment reverses a previous decrement for the same class of assets that was recognized in earnings. In that case, the increment is recognized in earnings to the extent of the previous decrement recognized in earnings. Analogously, revaluation decrements are recognized as expenses unless the decrement reverses an existing previous increment for the same class of assets that was credited directly to an equity revaluation reserve. In that case, the decrement is recognized as an adjustment to the revaluation reserve, to the extent of the previous increment recognized in the revaluation reserve.' The standard applies to all noncurrent assets other than inventories or foreign currency monetary assets, except that goodwill can be revalued only downward. Under Australian GAAP, required disclosures for revalued assets include, for each class of revalued asset, the year of the revaluation and whether the carrying amounts were determined by an independent valuation. For revaluations based on independent valuations, the revalued amount equals the amount to which the independent valuer certifies and the valuer's name is disclosed in the annual report. Disclosures also include, by class of asset, the amount before accumulated depreciation of
^ Recoverable amount can be calculated based on the present value or nominal value of these cash flows, at the discretion of management, and the calculation method must be disclosed. Approximately 30% of our sample firms discount future cash flows in determining recoverable amount. For upward revaluations, the revalued carrying amount need not equal, but must not exceed, recoverable amount, although it is rare for upward revaluations to be based on recoverable amount. In contrast, downward revaluations must be to recoverable amount. 'When depreciable assets are revalued, any balances in accumulated depreciation are credited to the asset account to which they relate and subsequent depreciation is based on the revalued amount. As revalued assets are depreciated, depreciation of the revalued amount is considered realized. Any gain or loss on revalued assets is the difference between the carrying amount of the asset at disposition and the proceeds. Thus, the gain or loss included in earnings does not include any unrealized revaluation increment that previously was recognized directly in the equity revaluation reserve. See also Easton, Eddey, and Harris [1993] for further discussion of Australian GAAP for revaluations.

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assets carried at revalued amounts and at cost. We exploit these disclosures to provide evidence on value relevance of revalued assets by class of asset and hy source and age of revaluation.
2.2 RELATED RESEARCH

2.2.1. Asset Revaluations. This study directly contributes to the literature investigating asset revaluations of Australian and U.K. firms. Some studies (e.g.,Amir, Harris, and Venuti [1993] and Barth and Clinch [1996]) investigate asset revaluations using reconciliations between domestic and U.S. GAAP earnings and shareholders' equity, which the U.S. Securities and Exchange Commission (SFC) requires for foreign firms trading equity shares in U.S. markets. Although the reconciliations permit direct comparisons of cost and revalued amounts for the same assets, they do not permit investigating disaggregated asset revaluations. Moreover, most crosslisted revaluation firms are U.K. firms, which generally only revalue PPE. For a combined U.K. and Australian sample. Amir, Harris, and Venuti [1993] find some evidence of value relevance for revaluation-related reconciling items, whereas Barth and Clinch [1996] find that neither U.K. nor Australian asset revaluations are positively correlated with information investors use in setting share prices. Other studies investigate asset revaluations by firms that do not necessarily trade shares in U.S. securities markets. Investigating Australian firms. Brown, Izan, and Loh [1992], Henderson and Goodwin [1992], Whittred and Chan [1992], and Cotter [1997] focus on managements' motivations for revaluing assets, whereas Sharpe and Walker [1975], Brown and Finn [1980], Standish and Ung [1982], and Emanuel [1989] investigate the impact of revaluation announcements on share prices. Investigating U.K. firms, Aboody, Barth, and Kasznik [forthcoming] find that PPF revaluations have predictive power regarding future profitability. The most closely related study is Easton, Eddey, and Harris [1993] (henceforth EEH), which investigates value relevance of Australian asset revaluations for 72 industrial firms from 1981 to 1990. EEH find that aggregate revaluation reserve increments have significant explanatory power for returns over earnings and earnings changes, and that the level of the aggregate revaluation reserve has significant explanatory power for price-to-book ratios. They also find that including the revaluation reserve in book value results in price-to-book ratios closer to one and with lower variance than those obtained when excluding the revaluation reserve. EEH interpret their findings as indicating asset revaluations help align market and book values of equity, although revaluations are not timely. Bernard [1993] notes that EEH's finding of value relevance for revaluations is particularly interesting because property, i.e., land and buildings, is the primary target of revaluations for EEH's sample firms, and the link between real estate values and operating cash flows need not be strong. Not only are EEH unable to distinguish property revaluations from revaluations of other assets, but also share prices provide only

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an indirect measure of expected future operations. We provide direct evidence on these two issues by investigating separately property revaluations and by investigating the association between revaluations and firm value based on forecasts of future earnings. This study extends FEH by partitioning assets into major asset classes and, as Bernard [1993] suggests, by estimating the relation between revalued amounts and an estimate of firm value based on analysts' earnings forecasts (Frankel and Lee [1996]). Also, we investigate separately nonfinancial, mining, and financial services firms, provide evidence on value relevance for three major classes of assets: investments, PPE, and intangibles, and subclasses within these three, and investigate whether capital market participants interpret differently director- and independent appraiser-determined value estimates and whether the age of revaluations affects their value relevance. We also explore whether value relevance of asset revaluations differs for revalued amounts above and below historical cost and investigate whether the relation between returns and revaluations differs for revaluations initially recognized directly in equity and in earnings. Because our 1991-95 sample period includes growth and recession years, we investigate separately upward and downward revaluations. Finally, we investigate differences associated with firm size, analyst following, and asset turnover in revaluations' value relevance and relation with returns.^ 2.2.2. Financial Assets. By investigating revalued investments, this study also contributes to the financial assets fair value literature (e.g.. Landsman [1986], Barth [1991], Bartb, Beaver, and Landsman [1992], Barth [1994], Bernard, Merton, and Palepu [1995], Barth, Beaver, and Landsman [1996], Fccher, Ramesh, and Thiagarajan [1996], Nelson [1996], and Venkatachalam [1996]). These studies' findings indicate that fair value estimates are value relevant for at least some financial assets, particularly banks' investment securities, which are listed investments. The investments asset class we investigate is composed primarily of associated company and listed investments. Also, we report evidence for three major industry groups, including financial firms. In Australia the financial firm group includes four large banks, and a few smaller and regional banks, plus nonbanking financial sector firms, so it is more diverse than the U.S. bank samples in the cited studies. 2.2.3. Nonfinancial Assets. This study also contributes to the literature investigating asset value-related estimates for nonfinancial assets of U.S. firms. Although the estimates these studies investigate are not
8 Easton and Eddey [1997] extend EEH to 1991-93. They find that the revaluation reserve increment (change in revaluation reserve increment) individually provides significant explanatory power for returns incremental to earnings and changes in earnings for 1991 (1992). In 1993, the revaluation reserve increment and change in revaluation reserve increment together provide significant incremental explanatory power. They also find that in 1992 net increases and decreases to the revaluation reserve are value relevant, but in 1991 only net decreases are value relevant.

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estimates of fair value per se, the estimates likely are more closely related to fair values than to historical costs. The studies provide mixed evidence regarding the estimates' value relevance. For example. Bell [1983], Magliolo [1986], and Harris and Ohlson [1987] present mixed findings regarding the incremental explanatory power of oil and gas disclosures under SFAS No. 19 (FASB [1977]), which one can view as fair value disclosures. When investigating current cost and constant dollar disclosures related to inventory and PPE under SFAS No. 33 (FASB [1979]), Beaver and Landsman [1983], Beaver and Ryan [1985], and Bernard and Ruland [1987] find no evidence of value relevance of the current cost or constant dollar amounts incremental to book values. Other studies (e.g., Bublitz, Frecka, and McKeown [1985], Murdoch [1986], Haw and Lustgarten [1988], Hopwood and Schafer [1989], and Lobo and Song [1989]) find incremental explanatory power for current costs in particular settings. One explanation these studies offer for lack of value relevance is that the disclosed amounts contain nontrivial estimation error.

3. Research Design
3.1 PRICE REGRESSIONS

We seek to assess the value relevance of revaluations as a recognition basis for assets, where value relevance refers to the ability of revalued asset amounts to reflect information relevant to investors. We begin by using share price as a summary measure of information relevant to investors and investigate the ability of recognized financial statement amounts to explain this measure, based on (1).
Pn = Wo + w\BVEn + w^NIn + (Hit (1)

where P is share price of firm i at time t, EVE is book value of equity per share, and NI is net operating income per share. We include BVE and M i n (1) as summary measures of information reflected in financial statement accounting numbers. We include W ^"^d ^it ^'^ capture Q the portion of price unexplained by BVE and NI. EEH also use (1), without the intercept, as the basis for their regression equations. Equation (1) also is consistent with the theoretical model in Ohlson [1995]. Book value of equity and earnings are the explanatory variables in (1), yet we seek to determine whether revalued assets' value relevance varies across asset classes, source of value estimates, or age of revalued amounts. To this end, we partition BVE as follows: BVE = BV+ INVEST_COST+ INVEST_REVAL + PPE_COST + PPFLREVAL + INTAN_COST + INTAN_REVAL (2) where BV is book value of equity after subtracting recognized amounts related to investments (INVEST), property, plant, and equipment (PPE), and intangible assets (INTAN); and _COST and .REVAL denote investments, property, plant, and equipment, or intangible assets recognized at

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cost or at revalued amounts. When investigating subclasses of assets and the source or age of revaluations, we use alternative partitions of BVF. Substituting (2) for BVE in (1), and estimating a separate coefficient for each variable in (2), results in our primary regression equation: P =aQ+ a^BV+ a^NI* a^DISC + a^INVFST_COST + a^INWST_REVAL + a^PPF_COST+ ajPPF^RFVAL + agINTAN_COST + agINTAN_RFVAL + e (3) where P is share price as of fiscal year-end. We also include an additional variable in (3), DISC, which represents valuation increments or decrements relating to investments, property, plant, and equipment, and intangibles disclosed in footnotes but not recognized in the financial statements, e is the regression error term.^ All variables are deflated by number of shares outstanding and firm and time subscripts are suppressed.^" We predict all coefiicients in (3) to be positive; a coefficient indistinguishable from zero indicates the associated variable is not value relevant. Because (3) includes components of book value of equity and net income, we cannot predict coefficient magnitudes (Ohlson [1995]). However, we report tests of equality of various combinations of coefficients in (5) to test whether cost or revalued amounts are priced by investors difi^erently from each other or from other assets.^^
3.2 NON-MARKET-BASED FIRM VALUE REGRESSIONS

Bernard [1993] suggests using benchmarks based on estimated future operating profitability to investigate whether revalued asset amounts are value relevant. Using such a benchmark provides evidence on whether
^ EEH also include revaluation increments in their price regressions. However, because of severe multicollinearity, they report regression summary statistics from estimating equations that include only the aggregate revaluation reserve or the revaluation increments. Thus, we include in (3) only asset revaluations, which is the analogue of EEH's revaluation reserve variable. In section 6, we report findings relating to revaluation increments. Also, one can interpret EEH's price regression as permitting the coefficient on current-year revaluations, i.e., the revaluation increment, to differ from that on revaluations from prior years, i.e., the aggregate revaluation reserve. In section 5.4, we permit the asset revaluation coefficients to vary for three age groups, including the current year. '"Deflation mitigates potential effects of scale on our inferences. Untabulated findings reveal our inferences are insensitive to using book value of equity (as in EEH) or sales as alternative deflators and estimating the equations in undeflated form, but including sales, number of shares, or V, defined below, as additional independent variables (Barth and Kallapur [1996]). Our inferences also are unaffected by using prices in (3), analyst earnings forecasts in (4), and returns in (8) as of three months after year-end. "These tests assume that within an asset class revalued and nonrevalued assets are economically similar. Because upward revaluations are discretionary, revalued and nonrevalued assets could be economically different. To the extent they differ, our tests of coefficient equality could lead to incorrect inferences regarding the characteristics of revaluations. However, we have no basis to predict whether such differences exist or, therefore, their effects on the coefficient estimates.

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the link between asset values and future operations is important for value relevance. Thus, we estimate versions of (3) where the dependent variable is an estimate of firm value based on analysts' earnings forecasts:
V = bQ+ biBV+ b^NI* b^DISC+ b^INVEST_COST + br,INVEST_REVAL + b^PPFLCOST + b'jPPE^REVAL + bglNTAN.COST + bglNTAN^REVAL + u. (4)

Variables other than V are as previously defined. Following Ohlson [1995] and Frankel and Lee [1996], Vis based on the following equation: 1 - rBVEt)/{l + r) + {FEt.,^ ' rBVEi^i)/{r{l + r)) (5)

where FJE^^-I is the I/B/E/S median earnings forecast as of the end of the current fiscal year, t, for following year, t+ 1; FEf.^.^ i* "^^e IIBIEIS median earnings forecast at year t for year t + 2; and r is tbe discount rate, which we assume equals 10%. EVE, is shareholders' equity at year t and VE( + i is calculated usitig "clean surplus," which requires a forecast of the year t + 1 dividend. We use the year t dividend multiplied by the dividend growth rate over the past five years as the dividend forecast. Thus, V is the present value of forecasted abnormal earnings for two years, plus discounted abnormal earnings for the remaining years to infinity, assuming abnormal earnings for the remaining years equal year t + 2 abnormal earnings. We use analysts' forecasts for two years because IIBIEIS typically does not include forecasts beyond two years for Australian firms. To the extent revaluations of long-term assets affect forecasts of earnings beyond two years, our ability to detect a significant relation is impaired. Equation (5) simplifies to: V, = FE,^^l{r{l + r)) + {dtg,)l{l + r) (6)

where g, is the time t dividend growth rate (Penman [1996]). Thus, V reflects the present value of analysts' expected future earnings plus the present value of dividends between time t and the earnings forecast period. Representing firm value as the present value of future earnings is standard in the valuation literature (see, e.g.. Miller and Modigliani [1966]). However, rather than basing the value estimate on, e.g., past earnings as an estimate of future earnings. Vis based on analysts' forecasts of future earnings. ^^
3.3 RETURNS REGRESSIONS

Findings from estimating (3) and (4) provide evidence on whether revalued assets are value relevant, whether their implicit valuation co'2 Because of the link between Vand analysts' earnings forecasts, we reestimate (4) using f,+ l and f,+2 as the dependent variable. Our inferences are unaffected. Our inferences from (4) also are unaffected if price is included as an additional independent variable or used as an alternative deflator.

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209

efficients differ from those of assets recognized at cost, and whether estimation error in revalued amounts is sufficient to eliminate their value relevance. Because we cannot disaggregate revalued amounts into their cost and revaluation components, we cannot establish the incremental value of revalued amounts, given cost data. Also, we cannot distinguish whether cost-based amounts are value relevant because they are correlated with assets' values and/or whether revalued amounts are value relevant because they are correlated with assets' costs. To provide some evidence on this question and to investigate the timeliness of current revaluations, we investigate whether annual share returns are associated with current-year revaluations. As before, (1) provides the basis for the estimating equation. As in EEH, note that: ABVE = NI-DIV+ RRI+ other (7)

where A^VEis the change in book value of equity in year t, DTV is dividends, and RRI is revaluation reserve increment. That is, RRI is the amount of upward or downward asset revaluation for the year recognized directly in equity, other represents changes to equity other than from earnings, dividends, and increments to revaluation reserves. Thus, first-difTerencing (1), substituting (7) for ABVE, and deflating all variables by beginning-of-year price yields: RET = k^ + kiNI + k^ANI + k^RRI + V (8)

where RET is raw return, i.e., P^ + DTV^ - P^.j / P^.j, v includes other, and ^0 is WQI - WQM- ^ denotes annual change. As in (3) and (4), we disaggregate RRIinto revaluation increments by asset class. Also, recall that some revaluations, e.g., write-downs of assets not previously written up, are recognized in net income, RRIPL. Thus, we also partition earnings into operating earnings before revaluations and RRIPL by asset class, and estimate versions of the following returns equation: RET = Co + q M + C 2 A M + c^INVEST_RRI
CQINVEST_RRIPL

+
+

c^PPE_RR[
cyPPE_RRIPL

(|)

(9)

where RET is the firm's 12-month raw share return ending at fiscal year-end, RRI denotes the revaluation reserve increment for year t, and RRIPL denotes revaluations recognized in earnings. Other variables are as defined previously.^^
include ARRIin their returns specification, although, as with their price regressions, they report findings only for regressions that include either RRI or ARRI, but not both. Similarly, we do not include ARRI, or ARRIPL, in (8). Interpretation of findings from regressions that include both variables also is confounded because most firms do not revalue assets every year. For our sample firms, on average, each year 36% (31%) revalued assets through equity (earnings). Thus, for many firms, in a revaluation year ARRI equals Rft/and in the year following a revaluation, ATJ/i/equals -RRI,_^.

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4. Data and Descriptive Statistics


4.1 SAMPLE FIRMS AND DATA

The sample is composed of the 100 largest companies listed on the Australian Stock Exchange {ASX), as measured by market value of equity as of June 30,1996, and a random sample of 250 firms selected from the remaining Australian firms traded on the ASX with market value of equity greater than A$10 million. Seven hundred seventy-six of the 1,171 companies with June 30, 1996 ASX share prices meet our market capitalization criterion, indicating that one-third of traded AustraUan firms have market value of equity less than A$10 million. Nonetheless, our sample firms represent 81% of the total market capitalization of the ASX domestic stocks. We exclude 18 and 3 foreign-domiciled firms from the top 100 and random sample firms, respectively, because they do not follow Australian GAAP. We include a firm in our sample for the years it has data the equations require. We select the 100 largest firms to facilitate comparisons with EEH and extend the sample to smaller firms to facilitate generalization of our findings. The sample period is 1991-95. We obtain financial statement data from firms' annual reports to shareholders and market data from the Australian Graduate School of Management's Centre for Research in Finance share price file. We obtain analysts' earnings forecasts from IIBlEtS.
4.2 DESGRIPTIVE STATISTIGS

Table 1, panel A, presents industry and calendar year breakdowns of the sample firms. It reveals that no single industry dominates the sample, except gold mining firms, which comprise a large fraction of the mining industry sample. We present separate findings for firms in the nonfinancial, mining, and financial industries because the relation between share prices, or the non-market-based measure of firm value, and revalued amounts likely differs across industries. Data limitations preclude us from using more refined industry classifications. Because we select our sample based on 1996 market value of equity and do not require firms to have available data for all sample years, panel A also reveals that the sample size increases over time. Table 1, panel B, reveals small variations in market capitalization across industries but large variations in total assets and sales. Financial firms, on average, have large total assets, with a skewed distribution, reflecting their typical asset structure and the presence of some firms with extremely large total assets. Mining firms, on average, have the smallest sales, partially reflecting the fact that some mining firms are in the exploration stage and thus have large assets and/or market capitalization but small sales. These industry differences in accounting amounts refiect some reasons motivating our separate industry analyses. Table 2 presents descriptive statistics for market-to-book ratios and the regression variables, and the number of nonzero observations for

TABLE 1
Descriptive Statistics Relating to Sample of Publicly Traded Australian Firms from 1991 to 1995

Panel A: Industry and Calendar-Year Sample Composition


Industry Nonfinancial Developers and Contractors Building Materials Alcohol and Tobacco Food and Household Goods Chemicals Engineering Paper and Packaging Retail Transport Media Miscellaneous Services Miscellaneous Industrials Diversified Indtistrials Tourism and Leisure Total Nonfinancial Mining Gold Other Metals Solid Fuels Oil and Gas Diversified Resources Total Mining Financial Banks Total 1995 1994 1993 1992 1991 Observations Companies

7
8 5 6 3 3

6 6 4 6

7
7 4 5 2 3

7
3 5

4 6

2
3

2 2
1 4 2 7 8 9 5 4 65

2 4 2 2
1 3

2
5 5 12 13 13 6 8 96 39 15

2
3 3 9 6 9 6 6 71 25 13 3 12

2
5 3 8 9 8 6 5 74

30 34 18 26 11 13 8

20
15 39 44 47 28 26 359 141 57 13 62 9 282 39 16 13 90 47 205 846

2
3 8 8 5 3 53 24

5 6 3 3 2 6 5 12 14 14 6 8 100 42 15 3 14 2 76

27 12
3 13 2 57 8 4 3 19 9 43 174

26
10 3 13 2 54 8

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2
3 16 5 34 153

5 4 26 15 58 234

Mean 1,085.00 1,301.50 1,171.40 1,439.80 1,026.90 9,243.60 1,439.80 560.40 761.20

Median 256.80 133.90 194.60 228.00 90.40 280.10 228.00 30.60 45.80

Standard Deviation 1,926.50 4,343.50 3,046.30 2,826.30 3,640.00 29,943.20 2,826.30

2,154.20 2,104.70

100 76 58 Market capitalization is as of June 30, 1996; all other variables are as of the latest year the firm appears in the sample.

212

MARY E. BARTH AND GREG GLINCH


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each asset category. It reveals that the mean (median) market-to-book ratio ranges from 1.30 (0.99) for financial firms to 3.01 (1.67) for mining firms. These statistics indicate that, despite asset revaluations, on average, sample firms have net off-balance-sheet assets. Untabulated statistics reveal that for the three samples together, share price, P, and the nonmarket-based estimate of firm value, V, are highly positively correlated (Pearson correlation = 0.854). Although one would expect a significant positive correlation because both are measures of firm value, the difference in the source of the estimates makes the correlation striking. Table 2 reveals that revaluations comprise a large fraction of recognized amounts for all asset categories and most investment revaluations are based on directors' valuations. Revalued investment amounts most frequently are based on current valuations, although many mining and nonfinancial firms' investment revaluations are more than three years old.^'* In contrast, there are many PPE revaluations in all age categories for all three industries. Regarding timing of revaluations, untabulated statistics reveal that there are many PPE revaluations in each year since before 1981. Although some investment revaluations also predate 1981, there are almost none between 1981 and 1985. Almost no intangible asset revaluations predate 1988. Table 2 also reveals that many nonfinancial firms revalue intangible assets, but no mining and few financial firms do so.^^ However, because mining firms include intangible mineral rights in PPE, some revalued PPE for mining firms relates to intangible assets. Untabulated statistics indicate that the most commonly revalued intangible asset for nonfinancial firms is brands. For these firms, revalued intangibles include brands identified separately: 32%, brands, patents, and licenses identified as a group: 15%, licenses identified separately: 13.5%, goodwill: 13.5%, technology assets: 12%, and other, including executory contracts: 13.5%.'^ Finally, table 2 reveals that most revaluations are based on directors' valuations, except for PPE revaluations for nonfinancial and financial firms, which often are based on independent valuations.!^
''' Because most financial firms' investment revaluations that are based on directors' valuations also are current, our findings in table 6 below relating to age of financial firms' possessive investment revaluations could be attributable to the same revaluations as the findings relating to director-valuation-based financial firms' investment revaluations in table 5. The statistics in table 2 suggest that other revaluation partitions we investigate are unlikely to be driven by the same observations. '^Review of annual reports reveals that intangible assets revaluations do not relate to the purchase of intangibles, e.g., through a purchase-business combination. Rather, intangible asset revaluations relate to revaluing intangibles either by recognizing internally generated intangibles or changing the carrying amount of a purchased intangible asset. '^ The distributions of revalued intangibles are similar for the large- and small-firm subsamples, although large firms have a greater percentage of revalued goodwill and the small firms have a greater percentage of revalued brands and other intangibles. " T h e statistics in table 2 indicate that many of the cost and revaluation amounts have skewed distributions. However, untabulated statistics reveal that rank correlations among

REVALUED FINANCIAL, TANGIBLE, AND INTANGIBLE ASSETS

215

5. Findings from Price and Non-Market-Based Value Regressions


5.1 MAJOR ASSET CLASSES

Table 3, panels A and B, present summary statistics from estimating (3) and (4) together with p-values associated with tests of equality of coefficients. To mitigate effects of extreme observations, we exclude observations with estimated residuals greater than three standard deviations from zero. Also, we only estimate a coefficient for a particular asset partition if the numher of firms with nonzero observations for that partition exceeds five. Following Barth and Kallapur [1996], we hase all test statistics on White [1980] standard errors. The term significant refers to statistical significance at a levels less than 5%, using a one-sided alternative, because we predict all coefficients to he positive. Tahulated findings are hased on estimating all equations pooled cross-sectionally and intertemporally; untahulated findings from separate-year estimations result in similar inferences. Looking first at the price regression findings in tahle 3, panel A, we see that revalued amounts in all three asset classes are value relevant; the
coefficients on INVEST_REVAL, PPE_REVAL, and INTAN_REVAL are con-

sistently positive, as predicted, and significandy dilTerent from zero.^^ As expected, coefficients on most other independent variahles are significantly positive. The exceptions are those on intangihle asset cost-hased amounts, INTAN_COST, for mining firms, and other disclosed hut not recognized value estimates, DISC, for nonfinancial firms. The /j-values associated with tests of coefficient equality reveal that the null hypothesis that all halance sheet coefficients are equal is rejected, except for mining firms, indicating that not all components of hook value of equity have the same value multiple. Similarly, tests generally reject the null hypotheses that all _COST coefficients are equal, whereas equality of all _REVAL coefficients is rejected only for nonfinancial firms. Tests comparing coefficients on cost-based and revaluation-based amounts reject equality only for nonfinancial firms' PPE and intangible assets, suggesting that in most cases investors do not distinguish cost- and revaluation-based amounts for investments or PPE.

the variables are similar to the Pearson correlations. The statistics also indicate that the level of correlation is not extreme. The average absolute correlation (rank correlation) between each of the asset cost and revaluation amounts is 0.20 (0.18), 0.31 (0.32), and 0.45 (0.45), for nonfinancial, mining, and financial firms, respectively. '*To investigate whether the significant relation is attributable to the act of revaluation rather than to the revalued amounts, we reestimated (3) after including indicator variables that equal one if the firm had nonzero assets in that class and cost basis, and zero otherwise. Our inferences generally are unaffected. Also, because Mincludes revaluations recognized in earnings, RRIPL, we reestimated the table 3 specifications defining NIa.s net income excluding RRIPL. Our inferences are unaffected.

TABLE 3 Summary Statistics from Regression of Price, P, and Non-Market-Based Estimate of Value, V, on Income and Book Value of Equity Partitioned by Asset Class and Valuation Basis Sample of Publicly Traded Australian Firms from 1991 to 1995 Panel A: Price as Dependent Variable Nonfinancial Coef. ( Variable Intercept 0.40 3.16 1.34 12.20 BV 2.65 3.83 NI -0.37 -0.70 DISC COST 1.03 5.13 _INVEST 1.45 13.15 _PPE 1.18 7.17 _INTAN REVALUATION _INVEST 1.22 5.52 0.59 2.71 _PPE 0.65 7.85 _INTAN 347 n 0.808 Adj. ft2 p-Values for Tests of Coefficient Equality Coefficient Test Nonfinancial 0.00 All Balance Sheet 0.06 All _COST 0.03 All _REVAL 0.52 INVEST_COST and _REVAL 0.00 PPE_COST and _REVAL 0.00 INTAN_COST and _REVAL Mining Coef. t 0.19 2.32 1.24 6.48 1.95 2.66 3.39 3.84 1.40 1.37 -0.24 1.37 1.42 268 0.872 Mining 0.55 0.31 0.92 0.96 0.84 3.46 9.77 -0.23 3.03 5.82 Financial Coef. t 0.81 7.09 0.68 5.27 3.85 5.68 0.78 7.32 0.26 0.41 1.41 0.33 0.55 195 0.932 Financial 0.00 0.00 0.44 0.44 0.74 2.33 2.15 2.45 6.23 1.91

Panel B: Non-Market-Based Value Estimate as Dependent Variable Nonfinancial Mining Coef. ( Coef. t Variable Intercept 1.86 7.07 0.28 2.73 BV 0.61 4.51 0.43 4.07 1.75 3.92 2.46 3.36 NI 0.45 0.83 -0.19 -0.56 DISC COST _INVEST -0.39 -1.06 0.42 1.95 0.66 7.91 0.94 7.96 _PPE -0.35 -0.64 -0.27 -0.96 _INTAN REVALUATION 3.34 3.69 0.82 2.82 _INVEST 1.09 7.22 -0.64 -2.58 _PPE 0.35 2.19 _INTAN 129 184 n 0.684 0.909 Adj R2

Financial Coef. ( 1.83 3.95 0.52 2.08 1.81 2.43 -3.65 -1.69 0.22 1.47 3.07 -0.07 -0.17 67 0.748 1.03 1.97 3.42 -0.36 -0.26

/)-Values for Tests of Coefficient Equality Coefficient Test Nonfinancial Mining Financial 0.00 0.00 0.00 All Balance Sheet 0.07 0.01 0.00 All _COST 0.01 0.88 0.00 All _REVAL 0.04 0.00 0.20 INVEST_COSTand _REVAL 0.00 0.01 0.20 PPE-COST and _REVAL 0.04 INTAN_COST and _REVAL Pis share price as offiscalyear-end. Vis non-market-based estimate of firm value, based on present value of IIBIEIS analysts' earnings forecasts. BV is book value of equity after subtracting Investments (INVEST), property, plant, and equipment {PPE), and intangible assets (INTAN). NI\s operating income. DISCis disclosed, but not recognized, asset value estimates. COST and REVAL denote recognized amounts based on historical cost and revaluations. All variables are deflated by number of shares outstanding. Data limitations preclude estimation of coefficients for each asset partition. Coefficients are only estimated if there are nonzero observations for more thanfivefirms.

REVALUED FINANCIAL, TANGIBLE, AND INTANGIBLE ASSETS TABLE 4 Summary Statistics from Regression of Price, P, on Income and Book Value of Equity Partitioned by Asset Class and Valuation Basis Sample of Publicly Traded Australian Firms from 1991 to 1995 Nonfinancial Coef. t 0.37 3.08 1.35 ]13.25 2.45 3.98 -0.27 --0.47 0.00 1.31 1.32 1.50 1.86 1.10 0.46 1.22 0.38 0.91 0.85 346 0.832 0.00 6.08 5.01 ]13.01 4.90 5.85 0.92 5.61 1.69 1.40 5.28 Mining Coef. t 0.19 2.19 1.20 5.86 1.90 2.68 3.65 4.56 1.97 1.39 1.31 1.44 -4.83 2.27 1.59 0.99 -1.51 2.19 268 0.884 Mining 0.00 0.68 0.53 0.00 0.08 3.07 3.02 7.77 9.11 --3.50 3.92 3.18 2.23 --1.52 5.32

217

Variable Intercept BV NI DISC COST ^SSOdJNVEST _LISTED_INVEST ^ROP_PPE ^&E_PPE .^GDWL_INTAN -VARIED_mTAN REVALUATION -ASSOC^INVEST -LISTED_INVEST ^ROP_PPE .-P&FWPE ^VAR1ED_INTAN n Adj. /J2

Financial Coef. t 0.86 7.55 0.23 2.21 5.12 8.25 0.50 4.94 0.73 0.52 -0.40 0.85 -0.10 2.08 2.16 5.07 -0.92 5.56 -0.13 7.09

0.26 -0.52 -6.20 197 0.947

5.32 -1.78 -4.93

/(-Values for Tests of Coefficient Equality Coefficient Test Nonfinancial All Balance Sheet 0.00 ASSOC INVEST_COST and _REVAL 0.60 USTED INVEST_COST and _REVAL 0.78 PROP PPFLCOST and _REVAL 0.00 P&E PPE^COST and _REVAL 0.38 VARIED INTAN_COST and _REVAL 0.35

Financial 0.00 0.00 0,,82 0,,00

u.^.^.1 u.^ viv^iiuLt^u UJ iiuiiit^^i Ul siiaics uuLSLdiiuiiig. unin iiiiiiuiuons preciuae estimation ot coetnc

each asset partition. Coefficients are only estimated if there are nonzero observations for more than fiive firms.

Findings reported in section 5.2 below, where we partition by asset subclass, indicate that the rejections of coefficient equality in table 3 are attributable to property, in the case of PPE, and goodwill, in the case of intangible assets. If we turn next to the findings from the non-market-based estimate of firm value, V, regression, table 3, panel B, reveals that, because calculating V requires analyst coverage and earnings forecasts, the sample is less than one-half as large as the price regression sample. Nonetheless, regarding revalued amounts, there are only three inconsistencies between the findings based on price and V. Specifically, for nonfinancial

218

MARY E. BARTH AND GREG GLINGH

firms, revalued PPE is significantly negatively associated with V hut significantly positively associated with price. For financial firms, revalued investments and revalued PPE are insignificantly associated with V hut significantly associated with price. Tests comparing coefficients in panel B reject equality more frequently than is the case for the price regressions in panel A. In secdon 8.1 we report findings from estimadng (3) separately for the large and smaller sample firms. Firms with analyst coverage, which comprise the sample in tahle 3, panel B, are comparahle to the larger firm sample in section 8.1. Findings reported there for the larger firms are consistent with those reported in tahle 3, panel B. This suggests that the inconsistencies hetween the table 3, panel A and panel B findings are attrihutahle to differences in firm size across the two samples, not to differences in the dependent variahles, Pand V Thus, the tahle 3, panel B findings indicate that implications for future profitahility of revalued assets are reflected in non-market-hased estimates of firm value and in share prices.
5.2 ASSET SUBGLASSES

In this section, we investigate further the potential for differential value relevance across asset classes hy disaggregating each major asset class into two suhclasses. EEH's findings also motivate this secdon's analysis. Because more of EEH's sample firms revalue property than other assets, one interpretation of their findings is that their value relevance finding for revaluations primarily is attrihutahle to property. Our findings indicate this is not the case for our sample, in that investments' and intangihle assets' revalued amounts are significantly associated with share prices and estimates of future profitahility. However, in section 5.1 we aggregate property and plant and equipment; in this section, we investigate separately its two suhclasses.^^ Tahle 4 presents results from estimating (3) hut disaggregating investments into investments in associated companies and other, primarily listed, investments; PPE into property, primarily land and buildings, and plant and equipment; and intangihle assets into goodwill and other intangibles. Bernard [1993] leads us to expect that investments in associated companies, plant and equipment, and other intangihle assets are more likely to be associated with firms' future profitability and, thus, share prices, than listed investments, property, and goodwill. Findings in tahle 4 reveal that, as expected, revalued investments in listed companies are significantly associated with prices for all three industries. However, revalued investments in associated companies are only value relevant for mining firms. Also, revalued property is only mar-

'^ Property (plant and equipment) revaluation findings are based on 253 (98), 88 (82), and 60 (16) observations for nonfinancial, mining, and financial firms, respectively.

REVALUED FINANCIAL, TANGIBLE, AND INTANGIBLE ASSETS

219

ginally significantly positively associated with price for nonfinancial firms and it is insignificantly associated with price for mining and financial firms.2O Revalued plant and equipment is significantly related to price, but only for mining firms. Unexpectedly, revalued plant and equipment is significantly negatively associated with price for financial firms. There are insufficient observations to estimate a coefficient for revalued goodwill, perhaps because goodwill can only be revalued downward. However, consistent with table 3, table 4 reveals that revalued intangible assets other than goodwill are value relevant. Probability values from tests of equality of coefficients reject, among others, the null hypothesis that all balance sheet coefficients are equal for all specifications. However, the statistics fail to reject the null hypotheses of equal coefficients for cost and revalued amounts for several asset subclasses. For example, for nonfinancial and mining firms, only equality of cost and revalued property amounts is rejected. Failure to reject these null hypotheses suggests investors often do not distinguish valuation implications of cost and revalued amounts. We do not tabulate the summary statistics from regressions in which V is the dependent variable. However, the evidence from those estimations largely is consistent with that from the price regressions, although several coefficients are no longer significantly diiTerent from zero, likely reflecting the substantially smaller sample size. The most notable differences relate to nonfinancial and financial firms for which the coefficients on revalued property are significantly negatively related to V.
5.3 DIRECTORS VERSUS INDEPENDENT VALUERS

Australian firms can base revaluations on director or independent appraiser value estimates. We seek to determine whether value relevance of revalued amounts differs by valuation source. If independent appraiser estimates are more reliable than those of directors, either because of their asset value estimation expertise or because they lack motives to manage financial statement amounts, then one would expect independent appraiser-based revaluations to be more value relevant than those based on director valuations. If directors have private information about asset values and reflect that information in their value estimates, then one would expect director-based revaluations to be more value relevant. In many cases, firms disclose that the directors considered independent appraisals in arriving at their valuation. Table 5 presents the results. It reveals that, in most cases, revalued assets based on director and independent appraiser valuations are significantly positively associated with price, although, again, results for PPE
2" Untabulated findings reveal that the negative, although not significatit, coefficient on property revaluations for financial firms is attributable to banks. When we eliminate banks from the financial firm sample, the coefficient becomes significantly positive. Eliminating the banks also increases the significance of the positive coefficient on PPE in table 3.

220

MARY E. BARTH AND GREG CLINGH TABLE 5 Summary Statistics from Regression of Share Price, P, on Income and Book Value of Equity Partitioned by Asset Class, Valuation Basis, and Source of Valuation Sample of Publicly Traded Australian Firms from 1991 to 1995 Nonfinancial Variable Coef. 0.58 1.17 2.92 -0.32 1.19 1.41 0.99 1.03 -0.07 0.49 0.48 0.61 347 0.767 t 3.60 7.14 3.50 -0.64 4.34 9.35 4.73 3.39 -0.21 2.01 3.75 2.33 Mining Coef. 0.17 1.31 2.07 3.60 1.35 1.39 0.23 1.30 1.93 0.63 t 2.08 6.61 2.90 4.33 3.40 9.80 0.23 3.18 5.15 1.58 Financial Coef. 0.75 0.70 3.43 0.73 0.37 0.52 1.22 0.37 0.25 0.85 0.17 t 7.05 5.71 5.52 7.54 3.46 2.46 2.77 6.59 3.47 2.63 0.44

Intercept BV NI DISC COST _INVEST _PPE _INTAN REVALUATION _INVFST_DIRECTOR _INVEST_INDEPENDENT _PPEJOIRECTOR _FPE_INDEPENDENT _INTAN_DIRECTOR _INTAN^NDEPFNDENT
n

Adj. fi2

268 0.875

195 0.933

/(-Values for Tests of Coefficient Equality Coefficient Test Nonfinancial Mining Financial 0.09 0.00 0.00 All Balance Sheet 0,,17 All INVEST_REVAL 0,,08 0,,06 0.01 All PPE^REVAL 0,,60 All INTAN_REVAL Pis share price as offiscalyear-end. BVis book value of equity after subtracting investments (INVEST), property, plant, and equipment (PPE), and intangible assets (INTAN). Mis operating income. DISC is disclosed, but not recognized, asset value estimates. COST and ftEVAL denote recognized amounts based on historical cost and revaluations. DIRECTOR and INDEPENDENT denote revaluation based on directors' and independent appraisers' valuation. All variables are deflated by number of shares outstanding. Data limitations preclude estimation of coefficients for each asset partition. Coefficients are only estimated if there are nonzero observations for more thanfivefirms.

are not consistent across the three industries.^' Interestingly, in several cases, coefficients on director-based revalued amounts are significandy larger than those on independent appraiser-based revalued amounts, suggesting the director-based amounts do not have more estimation error than the independent appraiser-based amounts. Untabulated findings from the Vregressions generally corroborate those from the price regressions, although some coefficients for nonfinancial and financial firms are no longer significant. Taken together, the table 5 findings indicate directors' valuations result in value-relevant revalued amounts as often as do independent appraisers' valuations, suggesting the relevance of directors' private information about asset values counterbalances the value
2' As with the table 4 results, the findings relating to PPE ior financial firms are sensitive to including banks in the sample. When we exclude banks, the coefficient on independent PPE revaluations for financial firms becomes significantly positive.

REVALUED FINANCIAL, TANGIBLE, AND INTANGIBLE ASSETS

221

TABLE 6 Summary Statistics from Regression of Share Price, P, on Income and Book Value of Equity Partitioned by Asset Class, Valuation Basis, and Age of Revaluation Sample of Publicly Traded Australian Eirms from 1991 to 1995 Nonfinancial Coef. t 0.37 1.38 2.18 -0.47 1.04 1.56 1.19 1.40 1.44 0.50 0.54 0.35 0.60 1.05 0.65 0.90 348 0.807 2.90 13.90 3.75 -0.86 4.92 14.23 7.52 3.28 5.31 0.88 1.58 1.22 1.55 4.93 8.52 6.13 Mining Coef. 0.26 1.22 1.73 3.19 1.54 1.35 -0.64 1.00 0.02 0.94 0.19 1.89 t 3.19 6.37 2.35 3.40 3.61 9.70 -0.57 2.36 0.05 2.03 0.33 4.86 Financial Coef. T 0.79 0.59 4.91 0.65 0.26 0.34 0.78 0.30 7.23 4.96 7.72 7.36 2.42 1.93 1.42 5.99

Variable Intercept BV NI DISC COST .JNVEST ..INTAN REVALUATION ^INVEST_CURR ..INVEST_PREV2 _INVEST_OLD .J'PE_CURR .SPE^OLD ^INTAN_CURR .JNTAN_PREV2

0.21 -0.07 4.90

0.76 -0.14 2.13

Adj.

268 0.872

196 0.947

/(-Values for Tests of Coefficient Equality Coefficient Test Nonfinancial Mining Financial All Balance Sheet 0.00 0.00 0.00 All INVEST_REVAL 0.05 0.06 All PPELREVAL 0.79 0.04 0.00 All INTAN.REVAL 0.03 Pis share price as offiscalyear-end. BVis book value of equity after subtracting investments (INVEST), property, plant, and equipment (PPE), and intangible assets (INTAN). Nlis operating income. DISCis disclosed, but not recognized, asset value estimates. COST and REVAL denote recognized amounts based on historical cost and revaluations. CURR, PREV2, and OLD denote whether the recognized revalued amount is based on a revaluation in the current year, the previous two years, or earlier. All variables are deflated by number of shares outstanding. Data limitations preclude estimation of coefficients for each asset partition. Coefficients are only estimated if there are nonzero observations for more thanfivefirms.

relevance enhancing eflFects of independent appraisers' expertise and lack of self-interest.


5.4 AGE OF REVALUED AMOUNT

Although current revaluations likely reflect current value, Australian firms need not revalue assets every year and, thus, some revalued amounts are hased on out-of-date, and perhaps stale, valuadons. To investigate effects on value relevance of revaluadon age, we reestimate (3) and (4) partitioning revalued amounts into three age categories: current year, previous two years, and older than three years. Tahle 6 reveals that revalued investments are significandy associated with price for more current age categories and revalued intangihle assets are value relevant regardless of age. Revalued PPE in no individual

222

MARY E. BARTH AND GREG CLINGH

age category is significandy related to price for nonfinancial firms; for mining firms, current and old PPE revalued amounts are value relevant, but not those in the PREV2 category; and for financial firms, only old revalued amounts are value relevant.^^ Tests of coefficient estimates reject the null hypothesis that different age category coefficients are equal in most cases. Untabulated findings from the V regressions generally corroborate those from the price regressions.

6. Findings from Returns Specifications


Thus far, the empirical analyses focus on associations between share price, or a non-market-based estimate of firm value, and assets recognized at revalued amounts. In this section, we estimate the relation between current-year revaluations and share returns. Finding a significant relation between revaluations and returns is strong evidence that revaluations are value relevant and timely. However, because firms do not revalue assets every year, there are substantially fewer observations for this analysis and revalued amounts likely reflect value changes over several years, resulting in the associated valuation effects being reflected at least partially in share prices before the returns window. Both of these effects reduce our ability to detect a significant relation between revaluations and returns. Table 7, panel A, presents summary statistics from estimating (8), which includes revaluation reserve increments, RRI, and revaluations included as part of earnings, RRIPL. It reveals that for nonfinancial firms, RRIPL is significantly positively related to returns, but RRI is not. The reverse is true for mining and financial firms. Panel B of table 7 presents results from estimating (9) and indicates that RRIfor investments is significandy positively related to returns for both applicable samples, whereas RRI for PPE is significantly positively related to returns only for mining firms. Contrary to predictions and expectations based on the price regressions, RRI for intangible assets is significantly negatively related to returns. The findings for RRIPL are noticeably different. For investments, RRIPL is insignificantly related to returns for all industries, whereas, consistent with predictions, for PPE and intangibles, RRIPL is significandy positively related to returns for all applicable samples. The asset class is "unknown" for some assets because disclosures do not always identify the asset class to which each revaluation relates. Table 7, panel C, presents results from esdmating (8) but parddoning revaluations by source, i.e., director- or independent appraiser-based valuations. Consistent with the price regressions, the findings suggest director-based revaluations are value relevant at least as often as independent
22 As with tables 4 and 5, the financial firm PPEfindingsare sensitive to including banks in the sample. When we exclude banks, the coefficient on old PPE revaluations becomes insignificantly different from zero.

REVALUED FINANCIAL, TANGIBLE, AND INTANGIBLE ASSETS TABLE 7

223

Summary Statistics from Regression of Returns on Income, Change in Income, and Current-Year Revaluations, Partitioned by Recognition in Earnings or Directly in Equity Sample of Publicly Traded Australian Firms from 1991 to 1995

Panel A: Aggregate Revaluations Nonfinancial Variable Coef. t Intercept 0.17 8.29 NI -0.20 -7.25 ANI 0.31 7.40 RRI 0.30 0.84 RRIPL 0.79 2.17
n Adj. i{2 303

Mining Coef. t 0.23 5.09 0.72 1.73 0.31 2.42 0.25 2.20 0.11 0.28
249

Financial Coef. t 0.13 4.98 -0.23 -2.42 0.08 2.92 0.19 1.92 -0.31 -1.40
166

0.144

0.092 Mining Coef. t 0.23 5.26 0.68 1.61 0.31 2.39 0.50 -0.58 1.19 2.11 -0.93 2.24

0.578 Financial Coef. t 0.13 4.87 -0.24 -2.38 0.09 3.27 0.23 2.43 -0.53 -0.68 -0.28 -1.35

Panel B: Revaluations Partitioned by Asset Class Nonfinancial t Variable Coef. Intercept 0.17 8.11 NI -0.20 -7.57 ANI 0.31 7.74 RRI_INVEST I.Ol 1.85 RRI_PPE 0.24 0.57 RRI^INTAN -1.61 -4.81 RRI^unknown -5.83 -1.19 RmPL_INVEST -5.14 -1.38 RRIPL_PPE 1.32 3.31 RRIPL_INTAN 1.84 1.91 RRIPL^unknown -2.71 -0.46
n 304

249

166

0.096 Panel C: Revaluations Partitioned by Valuation Source Nonfinancial Mining Variable Coef. ( Coef. t Intercept 0.17 8.17 0.23 5.01 NI -0.20 -7.23 0.72 1.58 ANI 0.31 7.37 0.31 2.40 RRI_DIRECTOR 0.78 2.10 0.27 1.33 RR1_INDEPENDENT 0.87 1.25 RRI^unknown 0.08 0.16 0.19 0.24 RRIPL^DIRECTOR 1.43 3.46 -0.61 -0.09 RRIPL_INDEPENDENT 4.03 2.37 RRIPL_unknown -0.12 -0.15 0.12 0.30
n 303 249

Adj. fl2

0.143

0.575 Financial Coef. t 0.13 5.01 -0.21 -1.88 0.06 1.32 0.14 0.14 0.26 0.77 0.20 1.05 -0.74 -1.43 -0.08
166

-0.65

Adj. /?2

0.137

0.084

0.580

^ ^ ^^. ^nd {pncef + dividends^ pnce^^^) I pricei j . NI is operat-

ing income. A denotes annual change. RRIis revaluation reserve increment, i.e., current-year revaluation amount recognized directly in equity. RRIPL is revaluation reserve increment in profit and loss. I.e., current-year revaluation amount recognized in earnings. INVESTis investments. PPEis property plant, and equipment. INTAN is intangible assets. DIRECTOR and INDEPENDENT denote source of revaluation amount, unknoim denotes revaluations where disclosures do not identify asset partition. Data limitations preclude estimation of coefficients for each revaluation partition. Coefficients are only estimated if there are nonzero observations for more than five firms.

224

MARY E. BARTH AND GREG CLINCH

appraiser-hased valuadons. Director-hased RRI and RRIPL and independent appraiser-hased RRIPL are significandy positively related to returns for nonfinancial firms; no other relations are significantly different from

7. Distinguishing Asset Impairment from Other Revaluations


This secdon reports findings from two analyses focused on the valuation effects of Australian accounting amounts that are not observed under U.S. GAAP. Australian GAAP requires recognizing revaluadons in earnings or equity depending on whether the revaluation is up or down and on prior upward or downward revaluations of the same assets. In particular, RRI is positive only when an asset is written up from its carrying value (either hased on previous upward revaluations or historical cost); RRI is negative only when a previously upward-revalued asset is revalued downward. RRI amounts would not he observed under U.S. GAAR24 Analogously, positive RRIPL would not he observed under U.S. GAAP because RRIPL is positive only for upward revaluadons of a previously downward-revalued asset, which is not permitted under U.S. GAAP. The only revaluadons permitted under U.S. GAAP are those recognized as negative RRIPL, i.e., a downward revaluation of an asset that bad not previously been written up. We reestimate (3) and (4) after pardtioning revalued amounts into those more likely to be stated above or below historical cost. Because the information necessary for a completely accurate partition is not available, we rely on a classificadon algoritbm and include an "unknown" category for each asset class. Our algorithm is as follows. First, we obtain the revaluation date from annual report footnote disclosures. Because our revaluation data begin in 1991, we classify revaluations as unknown if the date is before 1991. Second, if tbe date is between 1991 and 1995, we determine whetber there is a revaluadon increment in tbat year for the same asset class or, if there are no revaluation increments identified for that class, we determine whether there is an unclassified revaluadon increment.25 If we are unable to identify a revaluation increment in that year, we classify the revaluation as unknown. Third, if we identify a revaluation increment that matches by year and asset class, or is unclassified but matches by year, we classify the carrying value as above cost if the
23 In all three panels of table 7, nonfinancial and financial firms exhibit a significantly negative association between returns and net income. Untabulated findings indicate this result is attributable to the smaller sample firms. Omitting these firms results in a significantly positive association between returns and net income, without affecting our inferences relating to revaluation increments. 2* Although asset write-downs are required under U.S. GAAP, negative i{R/would not be observed under U.S. GAAP because a previous write-up of the asset could not occur. 2' By revaluation increment, we mean an increment or decrement, depending on the sign of the increment.

REVALUED FINANCIAL, TANGIBLE, AND INTANGIBLE ASSETS TABLE 8


Summary Statistics from Regression Price, P, on Income and Book Value of Equity, Partitioned by Revalued Assets Above and Below Cost Sample of Publicly Traded Australian Firms from 1991 to 1995

225

Variable Intercept
BV NI DISC COST INVEST -PPE ^INTAN REVALUATION ^INVEST_ABOVE ^INVEST_BELOW ^INVEST_unknown -PPFUS.BOVE ^PE_BELOW ^PFL.unknoxun .JNTAN_BELOW ^INTAN_unknown n

Nonfinancial Coef. t 0.43 3.50 1.39 13.48 2.53 4.18 -0.33 -0.61 0.92 1.40 1.25 2.11 1.02 0.99 0.47 6.26 0.83
-2.24 0.72

Mining Coef. t 0.25 2.93 1.23 6.19 2.17 3.04 2.89 3.69 1.54 1.32
-0.65

Financial Coef. t 0.73 6.92 0.79 6.70 3.53 5.45 0.76 7.64 0.32 0.43 1.17 0.39 0.18 0.36 0.55 1.18 3.32 2.53 2.85 6.46 2.83 3.52 2.08 3.25

3.97 13.46 7.66 11.64 1.95 10.86 2.03 2.95 3.57 -1.29 8.21

3.74 8.79 -0.59 4.65 2.70 0.83 1.88 6.25

5.90 1.76 0.50 1.46 1.55

345 Adj. R^ 0.822 /(-Values for Tests of Coefficient Equality Coefficient Test Nonfinancial All Balance Sheet 0, 00 All INVEST._REVAL 0, 00
All PPFLREVAL All INTAN_REVAL

268

194

0.879 Mining 0.00 0.00 0.23

0.940 Financial 0.00 0.03 0.00

0.02 0.09 Pis share price as offiscalyear-end. BVis book value of equity after subtracting investments (INVEST), property, plant, and equipment (PPE), and intangible assets (INTAN). Mis operating income. DISCis disclosed, but not recognized, asset value estimates. CO^Tand REVAL denote recognized amounts based on historical cost and revaluations. ABOVE, BELOW, and unknown denote whether the recognized revalued amount is likely above or below historical cost, or whether it is not possible to make an assessment. All variables are deflated by number of shares outstanding. Data limitations preclude estimation of coefficients for each asset partition. Coefficients are only estimated if there are nonzero observations for more thanfivefirms.

revaluation is to the revaluation reserve. We classify the carrying value as below cost if the revaluation is taken to earnings.^^ Table 8 presents findings relating to (3) and reveals that revalued investments and PPE are significantly related to share prices regardless of
2^ Obviously, our algorithm is imperfect. For example, all revaluations prior to 1991 are classified as unknown. Also, firms revalue assets by class, so it is possible that a revaluation we classify as above-cost actually is the net of an upward and downward revaluation of two assets within a single asset class. Moreover, it is sometimes difficult to identify the asset class to which a revaluation relates, even if a description of the asset is disclosed, e.g., some valuations are disclosed by asset class, but revaluation increments are sometimes disclosed by a coarser classification. To the extent there is error in our asset classifications, we will be unable to detect systematic differences between the revalued asset categories.

226

MARY E. BARTH AND GREG GLINCH

whether they are above or below historical cost, with the single exception of above-cost PPE revaluations for mining firms. These findings suggest that upward and downward revaluations of investments and PPE are value relevant. We are unable to classify most intangible revaluations, although those we are able to classify as below cost are insignificantly related to price. Tests of equality of coefficients reject the null, except for those on PPE for mining firms and intangible assets. Untabulated findings from the V regressions reveal some different inferences from the price regressions. For nonfinancial firms, below-cost revalued investments and all revalued PPE amounts are insignificantly positively related to V Contrary to predictions, above-cost revalued PPE for nonfinancial firms is significantly negatively related to V For mining firms, above-cost revalued PPE is significantly related to V; it is insignificantly related to price. For financial firms, no revalued amount is significantly related to V. Table 9 presents results from estimating the returns regressions, after partitioning RRI and RRIPL by sign. Panel A presents results for aggregate revaluations and indicates that, for nonfinancial firms, only negative RRIPL, which would be observed under U.S. as well as Australian GAAP, is significantly related to returns, and its relation is positive, as predicted. This finding indicates that asset write-downs from historical cost are relevant to investors and timely. For mining and financial firms, only positive RFil is significantly positively related to returns, as predicted. Contrary to predictions, positive RRIPL is significantly negatively related to returns for both samples. It is also negatively related to returns for nonfinancial firms, although not significantly so. These findings indicate that upward revaluations recognized in earnings are valued negatively by investors, suggesting investors discount discretionary earnings increases. For financial firms, investors also discount negative RRIPL; its coefficient is significantly negative.^^ Table 9, panel B, presents results from estimating (9) partitioning RRI and RRIPL by sign. It reveals that investments' RRI are positively related to returns, regardless of sign, but only positive RRI are significantly related. Findings for PPE RRI are mixed. Negative PPE RRI for nonfinancial firms are significantly positively related to returns, as predicted, but the relation is insignificant for the other two industries. Positive PPE RRI are significantly positively related to returns for financial firms but are significantly negatively (insignificantly) related for mining (nonfinancial) firms. Regarding RRIPL, in contrast to predictions, investment RRIPL are negatively related to returns, regardless of sign or industry, although only significantly so for positive RRIPL for financial firms. Negative PPE and
2'The number of notizero observations for RRI_POSITTVE (RRI^NECATIVE) is 29, 6, and 26 (31, 9, and 22) for nonfinancial, mining, and financial firms, respectively. For RRIPL^OSITIVE (RRIPL_NECATIVE) the number of nonzero observations is 8, 5, and 7 (34, 28, and 17).

REVALUED FINANCIAL, TANGIBLE, ANr> INTANGIBLE ASSETS TABLE 9

227

Summary Statistics from Regression of Returns on Income, Change in Income, and Current-Year Revaluations, Partitioned by Recognition in Earnings or Directly in Equity and Sign Sample of Publicly Traded Australian Eirms from 1991 to 1995

Panel A: Aggregate Revaluations Variable Intercept


NI ANI

RRI.J'OSITIVE RRI_NEGATrVE RRIPL_POSmVE RRIPL_NEGATIVE


n Adj. /?2

Nonfinancial Coef. t 0.17 8.20 -0.20 -7.24 0.31 7.38 0.03 0.07 0.76 1.21 -2.60 -1.34 0.40 4.28
303

Mining Coef. t 0.23 5.13 0.71 1.63 0.31 2.42 0.53 3.24 0.54 0.82 -12.88 -2.46 -0.18 -1.05
249

Financial Coef. t 0.12 4.07 -0.23 -2.36 0.08 2.58 0.23 1.74 0.07 0.26 -0.24 -2.28 -0.42 -7.36
166

0.140

0.087 0.23 0.68 0.31 5.22 1.53 2.40 2.49 0.77 -1.42 1.59

0.573 0.13 -0.24 0.08 0.26 0.12 -1.70 -0.11 -0.25 -0.40 4.04 -2.37 2.92 1.96 0.48 -2.15 -0.10 -2.33 -1.72

Panel B: Revaluations Partitioned by Asset Class Intercept 0.17 8.02 NI -0.20 -7.59 &NI 0.31 7.75 RRI_INVEST_POSmVE 0.85 1.91 RRI-INVEST_NEGATIVE 14.80 1.27 RRI_PPEWOSITP/E -0.28 -0.61 RRI_PPE_NEGATrVE 0.80 1.65 RRI_unknown_POSITIVE -6.17 -1.19 RRIPL_INVEST_POSrTIVE -1.71 -0.83 RRIPL_INVEST_NEGATIVE -5.82 -1.42 RRIPL^PE^MEGATIVE 0.79 2.31 RRIPL_INTAN_NEGATIVE 1.60 1.67 RRIPL_unknown^NEGATIVE -3.40 -0.58
n 304

0.49 0.50 -0.91 0.88

249

166

Adj. fl2 0.144 Panel C: Revaluations Partitioned by Valuation Source Intercept 0.18 8.24 NI -0.20 -7.27 ANI 0.31 7.41 RRI_DIRECTOR_POSnTVE 0.55 2.93 RRI_DIRECTOR_NEGATTVE 19.66 2.17 RRI_INDEPENDENT_POSITIVE RRI_INDEPENDENT_NEGATIVE 13.20 2.82 RRI_unknown_POSITrVE -0.34 -0.65 RRI_unknown.jmGATIVE 0.54 0.78 RRIPL.MIRECTOR.J'OSrnVE RRIPLJDIRECTOR^NEGATIVE 1.02 2.72 RRIPL_unknown_POSrTIVE 1.69 0.37 RRIPL_unknown_NEGATIVE -0.47 -0.60
n 303

0.094 0.24 0.77 0.32 0.18 1.73 5.14 1.69 2.46 2.61 6.54

0.568 0.13 -0.20 0.05 0.23 -0.06 0.05 0.28 0.21 -0.11 -0.33 -0.81 -0.11
166

-0.14 15.44 -0.19


249

-0.20 1.51 -0.48

4.10 -1.83 1.26 1.35 -0.19 0.06 0.70 1.20 -0.11 -0.29 -1.66 -0.84

Adj. /J2

0.144

0.088

0.569

Returns are 12-month returns ending at year-end (/m(re, + <iiuidmrfi,-/>ric,.i)//)n(;e,-i.fi/y is revaluation reserve increment, i.e., current-year revaluation amount recognized directly in equity. RRIPL is revaluation reserve increment in profit and loss, i.e., current-year revaluation amount recognized in earnings. NI is operating income. A denotes annual change. INVESTis investments. PPE is property, plant, and equipment. INTAN is intangible assets. DIRECTOR, INDEPENDENT, and unknoum denote source of valuation used as basis for revaluation amount. POSITIVE and NEGATIVE denote sign of revaluation amount. Data limitations preclude estimation of coefficients for each revaluation partition. Coefficients are only estimated if there are nonzero observations for more thanfivefirms.

228

MARY E. BARTH AND GREG GLINGH

intangibles' RRIPL are positively related to returns, as predicted. The findings indicate that returns generally reflect negative revaluations recognized in earnings as predicted. They also indicate that positive revaluations recognized in earnings are viewed negatively by investors, although the evidence relates only to investments. Table 9, panel C, reports findings from partitioning RRI and RRIPL by sign and source of valuation and reveals no particular pattern of significance for coefficients on director- and independent appraiserbased valuations; we have insufficient observations to estimate coefficients for independent-based valuations recognized in earnings.

8. Additional Analyses
8.1 FIRM SIZE

Sample firms comprise two disparate size groups, the top 100 firms and 250 smaller firms. It is possible that large and small firms have different economic characteristics, which could affect our inferences regarding revaluations. In particular, the availability of information sources to assist investors in their assessment of revaluation disclosures likely varies by firm size. Thus, we present in table 10 findings from price regressions analogous to those in table 3 separately for the top 100 firms and the 250 smaller firms. Table 10 reveals that investment and intangible revalued amounts are significantly positively related to price, regardless of firm size, with the single exception of investment revalued amounts for financial firms. In contrast, PPE revalued amounts are only significantly positively related to price for small nonfinancial, large mining, and small financial firms. Untabulated findings based on partitioning PPE into subclasses reveal that the significance of PPE for small firms is attributable to plant and equipment, not property. Untabulated findings also reveal little difference in significance between director- and independent appraiser-based valuations or age-partitioned revaluations, although director-based revalued amounts are somewhat more strongly associated vth price for small firms than independent appraiser-based amounts. Untabulated results from returns regressions indicate no systematic differences between large and small firms.
8.2 ANALYST FOLLOWING AND ASSET TURNOVER

Comparing the number of observations for the price and V regressions in table 3 reveals that many sample firms have no analyst following. Firms' information environments, such as reflected in analyst following, might affect how investors view revaluations. Also, because lack of analyst following is concentrated in the small firm sample, it is possible that the differences we document in table 10 are attributable to differences in analyst following. To investigate this possibility we partition the small

REVALUED FINANGIAL, TANGIBLE, AND INTANGIBLE ASSETS TABLE 10


Summary Statistics from Regression of Price, P, on Income and Book Value of Equity Partitioned by Asset Class Sample of Publicly Traded Australian Firms from 1991 to 1995 Partitioned by Siu Coefficients (t-Statistics)

229

Variable Intercept
BV NI

Nonfinancial Large Small 1.80 (4.73) 0.75 (5.49) 5.49 (4.43) -0.63 (-1.41) -0.05 (-0.17) 1.19 (6.56) -0.30 (-1.30) 0.66 (2.96) -0.89 (-1.88) 0.69 (3.74)
160

Mining Large Small 0.66 (2.29) 1.23 (4.89) 1.95 (1.46) 2.86 (3.13) 1.08 (1.93) 1.31 (6.12) -0.55 (-0.55) 3.47 (3.81) 1.64 (5.97) 0.41 (4.26) -0.18 (-0.56) 0.22 (4.15) 0.78 (3.51) 2.28 (4.31) 2.24 (1.15) 2.15 (5.12) 0.96 (5.64)

Financial Large Small 4.11 (10.31) -0.15 (-1.34) 2.89 (4.23) 0.39 (2.48) -0.29 (-2.97) -^.04 (-0.38) 3.71 (6.76) -0.75 (-4.88) -0.53 (-1.60) 0.38 (4.79) 0.68 (6.24) 2.83 (4.09) 0.62 (6.04) 0.70 (6.57) 0.55 (2.79) 0.03 (0.05) 0.41 (8.29) 1.12 (3.02)

0.08 (0.84) 1.49 (13.70) 1.16 (3.29) 1.31 (1.89) 0.96 (3.38) 1.25 (12.22) 1.43 (9.76) 1.87 (3.75) 1.04 (7.45) 1.78 (8.34)
188

DISC COST ..INVEST


^PE

..INTAN REVALUATION ^INVEST


^PE

^INTAN
n

105

161

62

135

Adj. ft2

0.794

0.830

0.814

0.659

0.959

0.905

Pis share price as offiscalyear-end. BVis book value of equity after subtracting investments (INVEST), property, plant, and equipment (PPE), and intangible assets (INTAN). NI is operating income. DISCis disclosed, but not recognized, asset value estimates. CO.ST and REVAL denote recognized amounts based on historical cost and revaluations. All variables are deflated by number of shares outstanding. Data limitations preclude estimation of coefficients for each asset partition. Coefficients are only estimated if there are nonzero observations for more thanfivefirms.

firm sample based on analyst following and repeat our price and returns analyses. Untabulated results reveal few systematic differences in significance of revalued amounts between the analyst and no-analyst samples. We observe only that investment revalued amounts are more strongly associated with price for financial firms not followed by analysts than for financial firms followed by analysts, and revaluations recognized in equity are positively related to returns for firms not followed by analysts, but negatively related to returns for firms followed by analysts.

230

MARY E. BARTH AND GREG GLINCH

Finally, detecting value relevance, and differences in value relevance, could be difficult for revalued amounts of firms with cost-based amounts close to current value. To investigate this possibility we reestimate the price and returns regressions, permitting the coefficient on PPE revaluations to differ for firms with low asset turnover. We define asset turnover as capital expenditures divided by the carrying amount of PPE, and set an indicator variable equal to one for firms with asset turnover below the sample median, and zero otherwise. Untabulated results reveal no significant incremental coefficient for nonfinancial firms. For mining firms, the incremental coefficient is significantly negative for aggregate PPE and plant and equipment revalued amounts; that on property revalued amounts is insignificantly positive. For financial firms, the incremental coefficient is insignificantly negative for PPE, reflecting a significantly negative (positive) incremental coefficient for property (plant and equipment). Only the plant and equipment finding is consistent with expectations. Untabulated results from the returns regressions indicate that, contrary to expectations, the incremental coefficient for mining firms is significantly negative. However, it is insignificantly different from zero for nonfinancial and financial firms. Thus, we find little evidence supporting the conjecture and none of these findings resolves unexpected findings in tables 3, 4, and 7.

9. Summary and Concluding Remarks


This study investigates the extent to which different types of revalued assets of Australian firms are associated with share prices and non-market-based estimates of firm value, which are based on the present value of analysts' forecasts of future earnings. We contribute to extant research on aggregate revaluation data by investigating whether relevance, reliability, and timeliness of revalued assets vary systematically by asset class or by source or age of the revalued amount, and whether price and return associations mirror the ability of revalued amounts to refiect anticipated future profitability. We also investigate whether asset impairments, a type of revaluation permitted under U.S. GAAP, exhibit different relations with firm value from other asset revaluations, which are not permitted under U.S. GAAP Taken together, our findings suggest revalued financial, tangible, and intangible assets are value relevant. Although the financial assets findings are not surprising based on prior research, the intangible assets findings are striking in their strength and consistency. Findings for PPE are less consistent, although the stronger value relevance for plant and equipment than for property suggests revalued operating assets are more value relevant than assets less directly related to operations. Perhaps surprisingly, there is little evidence to indicate that director- and independent appraiser-based valuations are viewed differently by investors, suggesting

REVALUED FINANGIAL, TANGIBLE, AND INTANGIBLE ASSETS

231

directors' private information enhances value estimates despite their potential self-interested financial statement management incentives. Also, several year-old revalued amounts are value relevant, suggesting timeliness is not critical for long-term asset revaluations. Finally, the evidence suggests that both upward and downward revaluations are value relevant, although the discretionary nature of asset write-ups through earnings can affect their value relevance.
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