Revaluations of Fixed Assets and Future Firm Performance: Evidence from the U.K.

Abstract

We find, as predicted, that upward revaluations of fixed assets by U.K. firms are significantly positively related to future firm performance. Also, current year revaluations (revaluation balances) are significantly positively related to annual returns (prices), indicating revaluations reflect asset value changes. Relations between revaluations and future performance and prices are weaker for higher debt-to- equity ratio firms, indicating motivation affects how revaluations reflect fundamentals. The relations also are weaker for cross-listed firms. Revaluations after a decline in real estate values and a discretion-reducing accounting proposal are less strongly associated with future performance and returns. Downward revaluations are significantly positively related to returns, but small (large) downward revaluations are insignificantly (significantly negatively) related to future performance.

JEL Classification: M41, M44, G12