JAR Revalued Tangibles and Intangible Assets Association with Share Prices and Non Market Based Value Estimates.pdf

8/17/2019 JAR Revalued Tangibles and Intangible Assets Association with Share Prices and Non Market Based Value Estimates…

1/36

Accounting Research Center, Booth School of Business, University of Chicago and Wiley are collaborating withJSTOR to digitize, preserve and extend access to Journal of Accounting Research.

http://www.jstor.org

Accounting Research Center Booth School of Business University of Chicago

Revalued Financial, Tangible, and Intangible Assets: Associations with Share Prices andNon-Market-Based Value EstimatesAuthor(s): Mary E. Barth and Greg ClinchSource: Journal of Accounting Research, Vol. 36, Studies on Enhancing the Financial ReportingModel (1998), pp. 199-233Published by: on behalf ofWiley Accounting Research Center, Booth School of Business,University of ChicagoStable URL: http://www.jstor.org/stable/2491314Accessed: 03-02-2016 14:34 UTC

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at http://www.jstor.org/page/ info/about/policies/terms.jsp

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of contentin a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship.For more information about JSTOR, please contact [email protected].

This content downloaded from 14.139.246.30 on Wed, 03 Feb 2016 14:34:43 UTCAll use subject to JSTOR Terms and Conditions

http://www.jstor.org/http://www.jstor.org/publisher/blackhttp://www.jstor.org/publisher/grad-uchicagohttp://www.jstor.org/publisher/grad-uchicagohttp://www.jstor.org/stable/2491314http://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/stable/2491314http://www.jstor.org/publisher/grad-uchicagohttp://www.jstor.org/publisher/grad-uchicagohttp://www.jstor.org/publisher/blackhttp://www.jstor.org/


2/36

Journal of Accounting Research

Vol. 36 Supplement 1998

Printedn

US.A.

Revalued Financial, Tangible,

and Intangible

Assets:

Associations withShare Prices and

Non-Market-Based

Value

Estimates

MARY E. BARTH* AND

GREG CLINCHt

1. Introduction

This

study nvestigates

hether elevance,reliability, nd timeliness

f

Australianasset revaluationsdiffer cross types

of

assets, ncluding

in-

vestments, roperty, lant and equipment,

and

intangibles.

We

also

in-

vestigate

whether

they

differ f the valuation amount is determined

by

the

firm's oard

of

Directorsor

an

independent

appraiser,

for

more

ver-

sus less timelyvaluations, and forrevalued amounts that are above or

below historical ost.1We base our

inferences

n

the association between

*Stanford

University;

tAustralian Graduate School

of

Management. We appreciate

helpful comments

and

suggestions by workshop participants

at

the 1998 Journal ofAccount-

ing 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

re-

viewer.

We

also appreciate

the

research assistance

of Kazbi Kothavala and

Kerry

Pat-

tenden and

funding by

the

Class

of

1969 Faculty

Fellowship and Financial Research

Initiative

of

the Stanford University Graduate

School of Business, and New York Univer-

sity'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.

1

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

revalua-

tions" to refer to revaluations made in the current

year.

199

Copyright ?,

Institute

of

Professional

Accounting,

1999

This content downloaded from 14 139 246 30 on Wed 03 Feb 2016 14:34:43 UTC


3/36

200

ENHANCING

THE

FINANCIAL

REPORTING MODEL:

1998

the recognizedamounts forvarious categories

of

revalued

assets

of

Aus-

tralian firms nd share prices and

a

non-market-based stimate

of firm

value, which s

based on

analysts'

arningsforecasts.

Our evidencebears directly n revaluationpracticesunderAustralian

GAAP However,our evidence also bears

indirectly n current

ssues fac-

ing the Financial

Accounting Standards

Board (FASB) in the United

States.

U.S.

GAAP requires disclosure,

and

the

FASB is considering

re-

quiringrecognition, f fairvalues of all

financial nstruments.

urrently,

there s no

U.S. proposal

to

disclose

or recognizenonfinancial

ssets

at

fair

value (FASB [1991;

1996]). Yet,fair

values of all assets ikely

re

rel-

evant to financialstatementusers.

One reason the FASB distinguishes

financial nd nonfinancial ssets s thebelief that fairvalues are not re-

liably estimable

for nonfinancialassets,especially ntangible

assets and

tangible assets

whose

value in

use varies from xit or entry alue (Barth

and Landsman

[1995]).

Because

Australian GAAPpermitsrevaluing

all

long-lived ssets

at

fairvalue (and many

Australian

firms o

so),

exam-

ining Australian evaluationsby asset

class

permits

us

to test

this

belief.

Also, Australian

GAAPpermitsrevaluationsbased

on

independent

ap-

praisers' or directors'

value estimates,

which maydiffer

n

reliability,nd

does

not require

revaluations

every year,

possibly

affecting

elevance

and timeliness.2We investigate ll of thesepossibilities.

Although revaluations

of

appreciated

assets are

discretionary

nder

Australian GAAP,

evaluations

of

impaired

assets

are required,

as

they

are

under U.S.

GAAP

However,

determiningwhether long-term

sset

is

impaired and the amount of

the impairmentrequires

considerable

judgment.3The

most

notable change

that

would result

from

adopting

fair

value accounting

for ong-lived

assets under U.S. GAAP

s

recogni-

tion

of

such

assets

at

amounts

in

excess of

depreciated

historicalcost.

Australian irms fford s an opportunity oprovide evidence on thisdi-

mension of the

fair

value

accounting

debate.

Specifically,

e

investigate

whether

revalued

amounts n

excess of historical ost are value

relevant

and

investigate

he relation

between

share returns nd

revaluations

hat

would not be

permitted

nder

U.S. GAAp

4

Our

primary

indings

re

based

on

estimating

elations

between share

price, or a firmvalue estimate

based

on

analysts' earnings

forecasts,

and

operating

earnings,book value

of

equity

minus the book values for

2

Australian

GAAPpermits onsiderable

discretionregarding sset

revaluations,nclud-

ing whether

and when to revalue

upward appreciated assets.

Thus, effects f discretion

can affect ur inferences.

Althoughwe interpret

ur findingswith

hispossibility

n

mind,

we leave to

future

esearch

a

comprehensive

tudy

f the

effects

f discretion.

3

Because of the diversemeasurement

nd disclosure practicesrelating

o asset impair-

ment, the FASB ssued Statement

fFinancial Accounting

tandardsNo. 121 (FASB [

1995]) in

1995,whichclarifies

GAAPrelating o mpairment

f

long-lived ssets

see, e.g., SFASNo.121

BasisforConclusions).

FAS

No.

121 became

effective fter

ur

sample

period.

4

By the term value relevant,"

e mean

that the amount has a significant

elation n the

predicted directionwith hareprices or the non-market-based stimateof firm alue.



4/36

REVALUED FINANCIAL, TANGIBLE,

AND

INTANGIBLE ASSETS 201

the asset classeswe investigate eparately, nd amounts

recognized at cost

and at revalued amounts for those asset classes. The

sample comprises

350 publiclytraded Australianfirms or 1991 through1995: the largest

100 firms nd a random sample of 250 smaller firms. ecause the rela-

tionswe estimate ikely iffer cross ndustries,we present

eparate find-

ings for firms n the nonfinancial,mining, nd financial ndustries.

Regarding sset class,we findthat, s expected based

on priorresearch

on fairvalues of financialassets, revalued investmentsre consistently

significantlyssociatedwith hare prices, except for nvestments f

non-

financial firmsn associated companies. We also findthat revalued

in-

tangible

assets are

consistently ignificantly ositively

ssociated with

share prices,contradicting he view that uch estimates re unreliable. n

fact,there

s little

evidence to indicate

that

nvestors

istinguish ecog-

nized cost and revalued amounts for nvestments nd

intangible ssets.5

The findings egarding evalued property, lant, nd

equipment PPE)

are less consistent.We find that revalued aggregate

PPE is significantly

positively

ssociated with share

prices

for firms

n all

three industries.

However,whereas revalued plant

and

equipment

is

value relevant

for

miningfirms,t is insignificantlyelated to share prices

for nonfinancial

firms

nd significantly egatively elated

to

share prices for

financial

firms.Revalued propertys not significantlyssociated withshareprices

for

any ndustry, lthough

t

is for nonbank

financial

firms.

Regarding

source of

revaluation value estimates,

we find littleevi-

dence

indicating ndependent appraiser-based

revaluation mounts

are

value relevantmore

often than

director-based mounts. These findings

suggest that

the

relevance

of

directors' private

nformation

bout

asset

values

can

outweighpotential

effects f directors' elf-interestn

the

es-

timates.

Regarding age

of

revaluations,

we

find

that

revalued

intangible

assets are value relevantregardlessof age, and that nvestment evalua-

tions fromother than the

current

year

are

value relevant

for

nonfinan-

cial

firms. urprisingly,evaluations

f PPE more than threeyears

old are

value relevant

more

consistently

han more

timely

evaluations.Taken

together,

hese

findings uggest

that ack of

revaluation

timelinessdoes

not eliminate the revalued amounts' relevance.

Finding

that revalued amounts are

significantly

ssociated with

share

prices suggeststheyhave implications

for firms'

futureprofitability.

s

Bernard [1993] suggests,we investigate hisdirectly y estimatinghere-

lation

between

the

revalued amounts

and

a

non-market-based stimate

of

firm

alue,

based

on the

present

value

of

analysts'

forecasts

f

future

earnings. Findings using

this firm

alue

estimate

generally

corroborate

5

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

identifywhether they relate to revalued investments.



5/36

202

MARY E. BARTH AND GREG CLINCH

thoseusing share prices, ncreasing ur confidence hatrevaluedamounts

reflect sset value estimates.

We

next estimatethe relation between share returns nd

current-year

revaluations,partitionedby whetherthe revaluationaffectsnet income

or is recognized directly n shareholders' equity.We find that aggregate

revaluations recognized directly

n

earnings are significantly ositively

related

to

share returns

or

nonfinancialfirms, ut those recognizedin

equity re

not.

The reverse s true

for

mining

nd

financial irms. urther

analysesreveal thatthepositive arningsrelationprimarilys attributable

to PPE and intangibleassetrevaluations,whereasthe positiveequityre-

lation primarily

s

attributable o

investments.

We

find ittledifference n

the

relation with returns

for

director-

r

independent appraiser-based

revaluations.

Relating

to

amounts

not

observed

under

U.S.

GAAP,we

first stimate

the

price specifications

fter

partitioning evalued

asset amounts

into

those stated bove cost (not permitted nder U.S. GAAP) and those stated

below

cost

(required under U.S. GAAP). We find revalued

amounts

for

investments nd

PPE

generally re

value

relevantregardless of

this

par-

titioning;

ata limitations

reclude conducting

this

analysis

for

ntangi-

ble

assets.Second, we findthatupward revaluations ecognized

n

equity

are positively elated to returns, lthoughnot significantlyo for non-

financialfirms.However,revaluations ecognized n earnings, egardless

of

sign,

re

negativelyssociatedwith eturns, ith he exception

of

down-

ward revaluations or nonfinancial

firms.

ownward

revaluations

recog-

nized

in

earnings,

.e.,

those

required

by

AustralianGAAPand U.S.

GAAP,

are

significantlyositively elated to returns

or

nonfinancial

firms.

Our

finding hatupward revaluations ecognized

in

earningshave

a

negative

relation with returns uggeststhe

market

discounts discretionary arn-

ings increases, because upward

revaluations are

discretionary.We

find

littledifference etween the returns indings or director- nd indepen-

dent appraiser-basedrevaluations.

Finally, ecause our sample comprises

firms

f disparate size, we also

estimate

the

price and

returns

regressions eparately

for

twosize-parti-

tioned samples.

We

find ittle

difference

etween them for revalued in-

vestments

nd

intangible assets,

but revalued PPE

is

more

consistently

value relevant

for

smaller

nonfinancial nd financialfirms.

Also,

revalu-

ations

by

smaller firms re

somewhat

more

consistently ignificantly

s-

sociatedwithreturns han those of largerfirms.

Section 2 describes Australian

GAAPfor

revaluations

nd reviews

re-

lated research. Section

3

develops the

estimation

quations and section

4

describes

the data and

descriptive

tatistics. ections

5

and

6

present

findings

rom

he price and non-market-based alue estimate egressions

and returns

pecifications, espectively.

ection

7

presentsfindings

rom

analyses

aimed

at differences

etween

upward

and

downwardrevalua-

tions,

nd section

8

presentsfindings

rom

dditional

analyses, ncluding

thosefrom ize-partitioned amples. Section 9 providesa summary nd

concluding

remarks.



6/36

REVALUED FINANCIAL,

TANGIBLE, AND

INTANGIBLE ASSETS

203

2.

Australian

GAAPfor

Revaluations nd

Related

Research

2.1

AUSTRALIAN

GAAP FOR

REVALUATIONS

Australian

GAAP (ASRB

1010 [1987], as

amended by AASB

1010

[1993]) permits

firms o revalue

noncurrent ssets

upward when

the as-

set's

recoverableamount exceeds

its

carrying mountand

requires firms

to

revalue

noncurrent assets downward

when the

asset's recoverable

amount fallsbelow tscarrying

mount.

The standarddefines

recoverable

amount as the net

amount expected to

be recovered

throughnet cash

inflows

risingfrom he asset's

continued

use and subsequent

disposal.6

Asset

revaluation ncrements

an be

recognizedonly f all

assets n an

asset

class are revalued, i.e.,

selective

upward revaluations re

not per-

mitted.However,revaluationdecrements,whenrequired, are permitted

for

ndividual assets.Revaluation

ncrements re credited

directly o

an

equity asset

revaluation

reserve,unless

the

incrementreverses

previ-

ous

decrement

for

the same class

of assets

thatwas recognized

in

earn-

ings.

In that case,

the increment s

recognized in

earnings to the extent

of the

previousdecrement

recognized

in

earnings.Analogously,

evalu-

ation

decrements are

recognized

as expenses unless the

decrement re-

verses an

existing

previous

increment

for the same class

of assets that

was crediteddirectly o an equityrevaluation reserve. n thatcase, the

decrement s

recognized

as an

adjustment

o the

revaluation

reserve,

o

the

extent

of

the

previous

ncrementrecognized

in

the revaluation re-

serve.7The

standard

applies

to

all

noncurrent ssets other

than

nvento-

ries

or

foreign

currency

monetary ssets,except that

goodwill

can

be

revalued

only downward.

Under AustralianGAAP,

equired disclosures

for

revalued

assets

in-

clude,

for each

class

of

revalued

asset,

the

year

of

the

revaluation and

whether he

carryingmounts were determinedbyan independentval-

uation.

For

revaluations

based

on

independent

valuations,

the

revalued

amount

equals the amount to which the

ndependent

valuer certifies nd

the

valuer's name

is

disclosed

in

the

annual

report.

Disclosures also

in-

clude, by

class

of

asset,

the amount

before accumulated

depreciation

of

6

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

determin-

ing recoverable amount. For upward revaluations, the revalued carrying amount need not

equal, but

must

not

exceed, recoverable

amount,

although

it is

rare for

upward revalua-

tions

to be based

on recoverable

amount.

In

contrast,

downward revaluations must be to

recoverable amount.

7When

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

in-

cluded in

earnings

does

not

include

any

unrealized revaluation

increment that

previously

was recognized directly in the equity revaluation reserve. See also Easton, Eddey, and Har-

ris

[1993]

for

further

discussion of

Australian

GAAP

for

revaluations.



7/36

204

MARY E. BARTH AND GREG

CLINCH

assets carried at revalued amounts and at cost. We exploit these disclo-

sures to

provide evidence

on

value relevance of revalued assets by class

of asset and by source and age of revaluation.

2.2

RELATED

RESEARCH

2.2.1. Asset evaluations.

This

study irectly ontributes o

the

litera-

ture

investigatingsset revaluations

f

Australian

nd U.K. firms.

ome

studies

e.g.,Amir,Harris, ndVenuti [1993] and

Barth

nd

Clinch

[1996])

investigate sset revaluations sing reconciliations etween domestic and

U.S. GAAP

arnings

and shareholders'

equity,which

the

U.S. Securities

and

Exchange Commission SEC) requires

for

foreign

irms

rading quity

shares

in

U.S. markets.Althoughthe reconciliations ermitdirect com-

parisons

of

cost and revalued amounts

for

the same assets,they

do

not

permit nvestigatingisaggregated ssetrevaluations.Moreover,most ross-

listed revaluationfirms re U.K. firms, hich generally nlyrevalue PPE.

For a combined U.K. and Australian sample, Amir,Harris, and Venuti

[1993] find some evidence of value relevance for revaluation-related

reconciling tems,

whereas

Barth nd Clinch

[1996]

find hatneither

U.K.

norAustralian sset revaluationsrepositivelyorrelatedwith nformation

investors se in setting hare prices.

Other studies nvestigate sset revaluationsbyfirms hat do not nec-

essarily

rade shares

in

U.S. securitiesmarkets.

nvestigating

Australian

firms, rown, zan,

and Loh

[1992],

Henderson and

Goodwin

[1992],

Whittred nd

Chan

[1992],

and Cotter

[1997]

focus on

managements'

motivations or evaluing ssets,whereas harpe and Walker 1975], Brown

and Finn

[1980],

Standish and

Ung [1982],

and Emanuel

[1989]

inves-

tigatethe impactof revaluation nnouncements

on

shareprices. Inves-

tigating

U.K.

firms, boody,Barth,

nd Kasznik

[forthcoming]

ind that

PPE revaluationshave predictivepower regardingfutureprofitability.

The most

closely

related

study

s

Easton, Eddey,

and

Harris

[1993]

(henceforth EH), which nvestigates alue relevance

of Australian sset

revaluations

for

72

industrial

firms rom 1981

to

1990.

EEH

find that

aggregate

revaluation reserve

increments

have

significant xplanatory

power

for

returns ver earnings

nd

earningschanges,

and that

the level

of

the

aggregate revaluation

reserve has

significant xplanatorypower

for

price-to-book

atios.

They

also findthat

ncluding

the revaluationre-

serve n book value results

n

price-to-book atioscloser to one and with

lower variance

than those obtained

when

excluding

the revaluationre-

serve.

EEH

interpret

heir

findings

s

indicating

sset revaluations

help

align

market

and

book values

of

equity,although

revaluations

re

not

timely.

Bernard

[1993]

notes that EEH's

finding

of

value relevance for

revaluations s

particularly nteresting

ecause

property, .e.,

land and

buildings,

s

the

primary arget

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 roperty

evalua-

tionsfrom evaluations f otherassets,but also shareprices provide only



8/36

REVALUED FINANCIAL,

TANGIBLE, AND

INTANGIBLE ASSETS

205

an

indirect measure

of

expected future

operations. We provide

direct

evidenceon these two ssues

by nvestigating

eparately roperty evalu-

ations

and by nvestigatingheassociation between

revaluations nd

firm

value based on forecasts f future arnings.

This

study

xtends

EEH

by partitioning ssets nto major asset

classes

and,

as

Bernard [1993] suggests, y estimating he

relation between

re-

valued

amounts

nd

an

estimate

f firm alue based on

analysts'

arnings

forecasts

Frankel

and

Lee

[1996]). Also,

we

investigate eparately

non-

financial,mining, nd financial ervicesfirms,

rovide evidence on

value

relevance for three major classes

of

assets:

nvestments, PE,

and

intan-

gibles, and subclasses

within

these three,

and

investigatewhether

cap-

ital marketparticipantsnterpret ifferentlyirector- nd independent

appraiser-determinedalue

estimates

nd

whether he

age

of

revaluations

affects heir

value relevance.

We also explore whethervalue relevance

of

asset revaluations iffers or

revalued

amounts

above and below historical

cost

and

investigate

whether the

relation between returns nd revalua-

tions differs

or

revaluations

nitially ecognizeddirectly

n

equity

and in

earnings. Because

our

1991-95 sample period includes growth nd re-

cession

years,we investigate

eparatelyupward and downwardrevalua-

tions.

Finally,we investigate ifferences

ssociated withfirm ize,

analyst

following,nd assetturnovernrevaluations' aluerelevanceand relation

withreturns.8

2.2.2.

FinancialAssets.

By

nvestigating

evalued

nvestments,

his

tudy

also

contributes

o the

financial ssets

fair

alue

literature e.g.,

Landsman

[1986],

Barth

1991], Barth,Beaver,

nd

Landsman

[1992],

Barth

1994],

Bernard, Merton,

and

Palepu [1995], Barth,

Beaver,

and Landsman

[1996],

Eccher, Ramesh,

and

Thiagarajan

[1996],

Nelson

[1996],

and

Venkatachalam

[1996]).

These

studies'

findings

ndicate

that

fair

value

estimates re value relevant orat leastsome financial ssets,particularly

banks'

investment

ecurities,

which

are

listed

investments.

he

invest-

ments sset class

we investigate

s

composed primarily

f

associated

com-

pany

and listed investments.

lso,

we

report

evidence for

three

major

industry roups, ncluding

financial

firms.

n

Australia he

financial

firm

group

includes four

arge banks,

and

a

few smaller

and

regional

banks,

plus

nonbanking

financial

ector

firms,

o it

s more

diverse

han the

U.S.

bank

samples

in

the cited

studies.

2.2.3. Nonfinancial ssets. This study lso contributes o the litera-

ture

investigating

sset

value-related

estimates for nonfinancial

assets

of

U.S.

firms.

Although

the

estimates

these

studies

investigate

re

not

8Easton

and Eddey

[1997] extend EEH to 1991-93. They find that the revaluationre-

serve ncrement change

in

revaluation

eserve ncrement) ndividually rovides ignificant

explanatorypower for

returns

ncremental o earnings

and

changes

in

earnings

for 1991

(1992).

In

1993, the revaluationreserve ncrement nd change in

revaluation

reserve

n-

crement

ogether rovide

ignificantncremental xplanatory ower.They also

find

that n

1992

net

increases and

decreases

to

the revaluationreserve re value

relevant,

ut in

1991

onlynetdecreases are value relevant.



9/36

206

MARY E. BARTH

AND GREG

CLINCH

estimates

f

fairvalue per se, the

estimates ikely re more closelyrelated

to fairvalues than to historical

osts.The studiesprovide mixed evidence

regarding

he

estimates'value

relevance.

For

example, Bell [1983], Mag-

liolo [1986], and Harris and Ohlson [1987] present mixed findings e-

garding the incremental

explanatorypower

of oil and

gas disclosures

under SFASNo.

19

(FASB [ 1977]), which

one can

view

s

fairvalue disclo-

sures.When investigatingurrent ost and constant

dollar disclosuresre-

lated to inventory nd PPE under

SEASNo. 33 (FASB [1979]), Beaver and

Landsman [1983], Beaver and

Ryan

[1985],

and

Bernard

and

Ruland

[1987]

find

no evidence ofvaluerelevance of the current ost or constant

dollar amounts ncremental o 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 explanatorypower for currentcosts in particular settings.

One

explanation

these

studiesoffer

or ack of

value

relevance

s thatthe

disclosed

amounts

contain nontrivial stimation rror.

3. Research

Design

3.1

PRICE

REGRESSIONS

We seek to assess thevalue relevanceof revaluations s a recognition

basisfor ssets,wherevalue

relevancerefers o the ability f revalued asset

amounts to

reflect

nformation

elevant

to

investors.We

begin by using

share

price

as

a

summary

measure

of

information elevant to investors

and

investigate

he

ability

f

recognized

financial tatement mounts to

explain

this

measure, based

on

(1).

Pit=

wo+wiBVEit+w2NIit+Oit

(1)

where P is share price of firm at time t,BVE is book value of equity

per share,

and NI is net

operating

income

per

share.

We

include BVE

and NI

in

(1)

as

summary

measures

of

information eflected

n

finan-

cial statement

ccounting

numbers. We include

w0

and

(hit

to

capture

the

portion

of

price unexplained

by

BVE

and

NI.

EEH also

use

(1),

without

he

intercept,

s

the basis for their

regressionequations. Equa-

tion

(1)

also

is

consistent

with the theoreticalmodel

in

Ohlson

[1995].

Book

value

of

equity

and

earnings

are the

explanatory

variables

in

(1), yet we

seek

to

determine

whetherrevalued assets' value relevance

varies across

asset

classes,

source

of

value

estimates,

r

age

of

revalued

amounts.

To

this

end,

we

partition

BVE

as

follows:

BVE

_

BV

+

INVEST

COST

+

INVESTJREVAL PPE COST

+

PPE-REVAL

+

INTAN COST

+

INTAN-REVAL

(2)

where

BV

is book

value

of

equity

after

ubtracting ecognized

amounts

related to investments

INVEST),

property, lant,

and

equipment (PPE),

and

intangible

assets

(INTAN);

and

-COST

and

JREVAL

enote invest-

ments, roperty, lant, nd equipment,orintangible ssetsrecognizedat



10/36

REVALUED FINANCIAL, TANGIBLE, AND INTANGIBLE ASSETS 207

cost or at revalued amounts.When investigatingubclasses of assets and

the

source or age

of

revaluations,we use alternative artitions f BVE.

Substituting 2) for BVEin (1), and estimating separate coefficient

for each variable in (2), results n our primary egressionequation:

P

=

ao

+

aBV

+

a2NI

+

a3DISC

+

a4INVEST

COST

+

a5INVESTLREVAL

+

a6PPE-COST

+

a7PPE-REVAL

+

a8INTAN-COST

+

agINTAN-REVAL

c

(3)

where

P is

share

price

as

of

fiscal

year-end.

We

also

include

an

addi-

tional

variable

in

(3), DISC, which representsvaluation

incrementsor

decrements

relating

to

investments, roperty,plant,

and

equipment,

and

intangiblesdisclosed

in

footnotesbut

not

recognized

in

the finan-

cial

statements.

is

the

regression rrorterm.9

All

variables are deflated

by number

of

shares outstanding

nd

firm

nd time

subscripts re sup-

pressed.10We predict

all

coefficients

n

(3) to be positive;

a

coefficient

indistinguishable rom ero indicates the associated variable s not value

relevant.Because

(3)

includes

components

of book value of

equity

and

net

income, we cannot predictcoefficientmagnitudes Ohlson [1995]).

However,we report testsof equality of various combinations of coeffi-

cients n (3) to testwhether ost or revalued amounts are priced by n-

vestors

differently

rom ach

other or fromother

assets.11

3.2

NON-MARKET-BASED FIRM VALUE REGRESSIONS

Bernard [1993] suggestsusing benchmarks

based on

estimatedfuture

operatingprofitability

o

investigatewhetherrevalued asset amounts are

value

relevant.

Using

such

a

benchmark

provides

evidence on

whether

9 EEH also include revaluation increments in their price regressions. However, because

of severe

multicollinearity, they report regression summary

statistics from

estimating equa-

tions 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.

10

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

earn-

ings

forecasts in

(4),

and returns

in

(8)

as

of

three months

after

year-end.

11

These tests assume that within an asset class revalued and nonrevalued assets are

economically

similar. Because

upward

revaluations

are

discretionary,

revalued and non-

revalued

assets could

be

economically

different. To the extent

they differ,

our tests

of

coefficient

equality

could

lead to incorrect inferences

regarding

the

characteristics of re-

valuations.

However,

we have no basis to

predict

whether such differences exist

or,

there-

fore, their effects on the coefficient estimates.



11/36

208

MARY E.

BARTH

AND

GREG

CLINCH

the link between asset values

and future operations

is importantfor

value

relevance.Thus,we estimateversionsof (3)

where the dependent

variable

s an estimate f firm alue based on analysts' arningsforecasts:

V

=

bo

+

b1BV+ b2NI

+

b3DISC+ b4INVESTCOST

+

b5INVEST-REVAL

+

b6PPE-COST

+

b7PPEREVAL

+

b8INTAN COST

+

bgINTAN-REVAL

+

u.

(4)

Variables

other

than

V are as

previously

defined. Following Ohlson

[1995] and

Frankel nd Lee [1996],

Vis based on the following quation:

Vt

-

BVEt

(FEt+

-

rBVEt)

1

+

r)

+

(FEt+2

rBVEt+

i)

/

r

1

+

r) (5)

whereFEt+i is the IIBIEIS median earningsforecast s of the end of the

current iscal

year,t,

for

following

ear, t

+

1;

FEt+2

is the IIBIES median

earnings

forecast t year

tfor

year

t

+

2; and r s thediscount rate,

which

we

assume

equals

10%.

BVEt

s

shareholders' equity

at year

t

and

BVEt

is calculated

using "clean surplus,"which requires

a forecast f the

year

t

+

1

dividend.We

use

the

year

t

dividend multiplied

by the dividend

growth ate over

the past fiveyears

as the dividendforecast.Thus,

V is

the

present value

of forecastedabnormal earnings

for two years,

plus

discounted abnormal earningsfor the remainingyears to infinity,s-

suming abnormal earnings for

the remainingyears

equal year t

+

2 ab-

normal earnings.We use analysts'

orecasts or two

yearsbecause

KBI//S

typically

does

not

include

forecasts beyond two

years for Australian

firms.To the extent revaluations

of long-term ssets

affect orecasts f

earnings beyond

two years,

our ability o detecta significant elation

s

impaired.

Equation (5) simplifies o:

Vt= FEt+21(r(1 + r)) + (dtgt)I(1 + r) (6)

where

gt

s

the

time t dividend

growth

rate

(Penman

[1996]). Thus,

V

reflects he presentvalue

of

analysts'

xpected future

arnings plus the

presentvalue

of

dividendsbetween

time

t

and the

earningsforecastpe-

riod.

Representingfirmvalue

as

the

present value

of

future earnings

is standard

n

the valuation

literature see, e.g.,

Miller and Modigliani

[1966]). However,

rather than basing the value

estimate on, e.g., past

earnings

s an estimate f future

arnings,

Vis

based

on

analysts'

orecasts

of future arnings.12

3.3

RETURNS REGRESSIONS

Findings

from

estimating 3)

and

(4) provide

evidence

on

whether

revalued assets are value relevant,whether

their

mplicitvaluation

co-

12

Because of

the

ink

between

Vand analysts' arningsforecasts,

e

reestimate 4)

using

FEt1,

and

FEt+2

s

the

dependent

variable.

Our

inferences re unaffected.

Our

inferences

from 4) also are unaffectedfprice is included as an additional independentvariable or

used

as

an alternative eflator.



12/36

REVALUED FINANCIAL,

TANGIBLE, AND INTANGIBLE ASSETS

209

efficients iffer

rom hose

of assets recognized at cost, and whether s-

timation

rror n revalued

amounts s sufficiento eliminatetheirvalue

relevance. Because we

cannot disaggregaterevalued amountsinto their

cost and revaluation

components,we cannot establish the

incremental

value of revaluedamounts,givencostdata. Also, we cannot distinguish

whether cost-based amounts

are

value relevant

because

they

re corre-

lated with ssets' values

and/or whetherrevalued amounts are

value rel-

evant because they re correlatedwith ssets' costs.

To

provide some evidence on this

question and

to

investigate

he time-

liness of current

revaluations,we investigatewhether annual

share re-

turns are associated with

current-year evaluations. As

before, (1)

provides the basis for

the

estimating quation.

As

in

EEH, note

that:

ABVE

=

NI-DIV+

RRI+

other

(7)

where ABVE s the

change

in

book value

of

equity

n

year t,

DIV is

divi-

dends, and RR

is

revaluationreserve increment. That is,

RH

is the

amount of

upward

or

downward

asset

revaluation

for the

year

recog-

nized

directly n equity. other

epresentschanges to equityother than

from

arnings,dividends, nd

increments

o

revaluationreserves.Thus,

first-differencing1),

substituting 7) for ABVE, nd deflating

ll vari-

ables by beginning-of-yearrice yields:

RET

=

ko

+

kjNI+

k2ANI+ k3RRJ+

v

(8)

where

RET

is raw

return,

.e.,

Pt

+

DIVt

-

Pt-,

/

Pt-,,

v

includes

other,

and

ko

s

wOt

wOt-l.

denotes

annual change.

As

in

(3) and (4), we disaggregateRRlJinto evaluation

ncrements y

asset

class.

Also,

recall that some

revaluations, .g.,write-downs

f

assets

not

previouslywritten p, are

recognized

in

net income, RRI2PL. hus,

we

also

partitionearnings

into

operating earnings

before

revaluations

and RRIPLbyasset class,and estimateversionsof thefollowing eturns

equation:

RET

=

co

+

cjNI

+

c2ANI

+

c3INESTLRRI

+

c4PPELRR

+

c5INTANJRI

+

c6INVESTJWJPL c7PPERRIPL

+

c8INTANPRRIPL

+

o

(9)

where

RET

is the

firm's

12-month

raw

share

return

ending

at fiscal

year-end,RRI denotes therevaluationreserve ncrementforyeart, nd

RRIPL

denotes revaluations

recognized

in

earnings.

Other

variables are

as defined

previously.13

13

EEH include ARRI in

their

returns

specification, although,

as with their

price

regres-

sions, they report findings only

for

regressions

that include

either RRJ or

ARRI,

but not

both.

Similarly,

we

do not include

ARRI,

or

ARRJPL,

in

(8). Interpretation

of

findings

from

regressions

that

include both

variables

also

is

confounded

because

most firms do not

re-

value 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 ARRJequals

RRI

and

in

the

year following

a

revaluation,

ARPJ

equals

-RR1t-1.



13/36

210

MARY E.

BARTH

AND GREG

CLINCH

4. Data and DescriptiveStatistics

4.1 SAMPLE

FIRMS AND DATA

The sample is composed of the 100 largest companies listed on the

Australian tock

Exchange (ASX), as

measured bymarket alue of equity

as of

June 30,

1996, and a random sample of250 firmselectedfrom he

remainingAustralianfirms raded on the

ASX withmarketvalue of eq-

uitygreater than

A$10

million.

Seven

hundred seventy-six

f

the 1,171

companies withJune 30, 1996 ASXshare

prices meet our market apital-

ization criterion, ndicating that one-third

of traded Australian firms

have marketvalue of equity less than

A$10 million. Nonetheless, our

sample firms epresent 1% of thetotalmarket apitalizationof the ASX

domestic stocks.We

exclude

18 and 3

foreign-domiciled

irms rom

he

top 100 and random

sample firms,

espectively, ecause theydo not fol-

low Australian

GAAP We include a firm

n

our sample for the years it

has data the

equations require. We select the 100 largestfirms o facili-

tate comparisons

with

EEH and extend

the sample to smaller firms o

facilitate

generalization

of our

findings.

The

sample period

is 1991-95.

We obtain financial

tatement ata

from

firms'

nnual reports

to share-

holders and market

ata from he AustralianGraduate School of Manage-

ment'sCentreforResearch nFinance sharepricefile.We obtainanalysts'

earnings

forecasts

rom

/BIEIS.

4.2

DESCRIPTIVE

STATISTICS

Table

1, panel

A, presents ndustry

nd

calendar yearbreakdowns

of

the

samplefirms. t revealsthat

no

single

ndustry ominates

the

sample,

except gold miningfirms, hich comprise

a

large

fraction

f

the

mining

industry

ample. We present eparate

findings orfirms

n

the nonfinan-

cial, mining, nd financial ndustries ecause the relationbetweenshare

prices,

or

the

non-market-based

measure of firm

value,

and

revalued

amounts

ikely

iffers

cross

ndustries. ata

limitations

reclude

us

from

using

more refined

ndustry

lassifications.

ecause

we select our

sample

based

on 1996

market

value

of

equity

and do not

require

firms o

have

available

data for

all

sample years,panel

A

also

reveals that

the

sample

size increases

over

time.

Table

1, panel

B,

reveals

mall

variations n market

apitalization

cross

industriesbut largevariations n totalassetsand sales. Financial firms,

on

average,

have

large

total

assets,

with

a

skewed

distribution,

eflect-

ing

their

typical asset structure nd the

presence

of

some firmswith

extremely arge total

assets.

Mining firms,

n

average,

have

the

smallest

sales, partially eflecting

he fact that some

mining

firms re

in

the

ex-

ploration stage and thus

have

large

assets

and/or

market

capitalization

but small sales.

These

industry

ifferencesn

accounting

amountsreflect

some

reasons

motivating

ur

separate

industry nalyses.

Table

2 presents

descriptive

tatistics or

market-to-book atios and

the regressionvariables,and the number of nonzero observationsfor



14/36

TABLE

1

Descriptivetatistics elating

o

Sample fPublicly radedAustralian irms rom 991 to 1995

Panel A: Industry nd Calendar-YearSample Composition

Total

Industry 1995 1994 1993 1992

1991 Observations Companies

Nonfinancial

Developers and Contractors 7 6 7 6 4 30 8

Building

Materials

8 6 7 7 6 34

8

Alcohol

and Tobacco 5

4

4 3 2 18 5

Food and Household Goods 6 6 5 5 4

26

6

Chemicals 3 2 2 2

2

11 3

Engineering 3

3

3 2 2 13 3

Paper and Packaging 2 2 2

1 1

8 2

Retail 5

3

5 4 3

20

6

Transport 5

3 3

2

2

15

5

Media

12

9

8 7

3

39 12

Miscellaneous Services 13

6

9 8 8

44

14

Miscellaneous Industrials 13 9 8 9 8 47 14

Diversified ndustrials 6 6 6 5 5

28

6

Tourism nd Leisure 8

6 5

4 3

26

8

Total Nonfinancial 96

71

74 65 53

359

100

Mining

Gold

39

25

27 26

24

141

42

Other Metals 15

13

12

10 7 57

15

Solid

Fuels 2

3

3 3

2

13

3

Oil and Gas 11

12

13 13 13

62

14

DiversifiedResources 2 2 2 2

1

9 2

TotalMining 69 55 57 54 47 282 76

Financial

Banks

8

8

8 8 7

39

8

Insurance

5

5 4

2

0 16

5

Entrepreneurial

nvestors 4

2

3 3

1

13 4

Investment nd Financial Services 24

17 19

16

14

90 26

Property

rusts 15

13

9

5

5

47 15

Total

Financial 56 45 43 34

27 205

58

Total

221 171

174 153

127

846

234

Panel

B:

Size of Sample Firms

Variable

Mean

Median Standard Deviation

Market

Capitalization

Nonfinancial

1,085.00

256.80

1,926.50

Mining 1,301.50

133.90

4,343.50

Financial

1,171.40

194.60

3,046.30

Total Assets

Nonfinancial

1,439.80 228.00

2,826.30

Mining 1,026.90

90.40

3,640.00

Financial

9,243.60

280.10

29,943.20

Sales

Nonfinancial

1,439.80 228.00 2,826.30

Mining

560.40 30.60

2,154.20

Financial

761.20

45.80

2,104.70

Number

of

Companies

Nonfinancial 100

Mining

76

Financial

58

Market

apitalization

s as of

June 0, 1996;

ll other ariables

re as

of the atest

ear

he

firm

ppears

n

the

sample.

This content downloaded from 14.139.246.30 on Wed, 03 Feb 2016 14:34:43 UTCAll use subject to JSTOR Terms and Conditions

http://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsp


15/36

212 MARY

E.

BARTH AND

GREG

CLINCH

TABLE

2

Descriptive

Statistics

Relating

to

Market-to-Book

Ratios

and

Variables

Used

in

the

Empirical

Tests

Sample

of

Publicly

Traded

Australian

Firms

from

1991

to

1995

Nonfinancial

Mining

Financial

Variable

Mean

Median

sd.

n

Mean

Median

s.d.

n

Mean

Median

s.d.

n

Market-to-Book

Ratio

2.11

1.43

5.09

353

3.01

1.67

6.13

272

1.30

0.99

1.69

199

P

3.61

2.58

3.51

353

2.53

1.20

3.60

272

3.42

2.00

4.92

199

V

3.62

3.09

2.67

185

2.68

1.92

2.80

130

4.45

3.84

3.19

67

BV

2.43

1.76

3.17

353

1.27

0.75

1.61

272

3.39

1.93

5.20

199

NI

0.20

0.16

0.40

353

0.09

0.04

0.22

270

0.24

0.11

0.45

199

DISC

0.15

0.05

0.26

132

0.09

0.01

0.25

107

1.24

0.07

3.21

76

INVEST

OST

0.43

0.12

1.14

209

0.32

0.12

0.40

169

2.47

0.62

5.51

108

REVAL

DIRECTOR-all

0.25

0.08

0.64

117

0.30

0.04

0.45

32

2.06

1.57

2.51

84

DIRECTORLCURR

0.32

0.14

0.83

66

0.38

0.07

0.54

17

2.21

1.69

2.56

77

DIRECTORLPREV2

0.24

0.14

0.28

16

0.05

0.00

0.14

10

0.31

0.07

0.51

4

DIRECTOR-OLD

0.08

0.01

0.12

44

0.19

0.02

0.31

15

0.13

0.09

0.10

9

INDEPENDENT-all

2.40

2.02

2.44

8

0.01

0.01

0.00

3

1.11

1.00

1.14

21

INDEPENDENT-CURR

1.45

0.72

1.92

7

0.02

0.02

0.00

2

1.11

1.00

1.14

21

INDEPENDENTJPREV2

2.85

2.85

0.06

2

0.01

0.01

1

0

INDEPENDENT-OLD

3.35

3.35

1

0

0

PPE

COST

1.98

1.11

3.12

349

1.94

0.99

2.96

267

1.24

0.32

3.30

121

REVAL

DIRECTOJLall

0.47

0.29

0.59

180

0.36

0.08

0.52

109

0.77

0.75

0.62

45

DIRECTORLCURR

0.34

0.14

0.51

77

0.20

0.07

0.38

44

0.99

0.95

0.63

26

DIRECTOILPREV2

0.42

0.16

0.68

81

0.23

0.08

0.33

36

0.34

0.13

0.42

16



16/36

REVALUED

FINANCIAL,

TANGIBLE,

AND INTANGIBLE

ASSETS

213

DIRECTOR-OLD

0.28

0.09

0.36

84

0.34

0.12

0.44

64

0.30

0.06

0.42

11

INDEPENDENT-all

0.44

0.27

0.41

161

0.45

0.09

0.76

23

1.85

0.59

2.70

35

INDEPENDENT-CURR

0.44

0.32

0.40

46

0.16

0.09

0.20

9

2.56

1.46

3.11

19

INDEPENDENT-PREV2

0.48

0.40

0.42

78

0.04

0.01

0.04

5

1.20

0.23

1.98

11

INDEPENDENT-OLD

0.18

0.13

0.24

77

0.58

0.07

0.91

15

0.21

0.21

0.19

15

INTAN

COST

0.53

0.13

1.00

277

0.15

0.07

0.17

56

0.74

0.09

1.48

66

REVAL

DIRECTOR-all

1.14

0.50

4.25

53

0

0.23

0.23

0.17

8

DIRECTORPCURR

0.14

0.05

0.16

13

0

0.21

0.23

0.10

4

DIRECTORLPREV2

1.40

0.05

5.57

29

0

0.20

0.05

0.26

3

DIRECTOR-OLD

1.30

0.17

2.15

14

0

0.45

0.45

1

INDEPENDENT-all

0.38

0.23

0.46

22

0

0

INDEPENDENT-CURR

0.88

0.74

0.89

3

0

0

INDEPENDENT-PREV2

0.46

0.28

0.45

9

0

0

INDEPENDENTOLD

0.17

0.21

0.10

10

0

0

P

=

Share

price

as

of

fiscal

year-end.

V

=

Non-market-based

estimate

of

firm

value,

based

on

present

value

of

IIBIEIS

analysts'

earnings

forecasts.

BV

=

Book

value

of

equity

after

subtracting

recognized

investments,

property,

plant,

and

equipment,

and

intangible

assets.

NI

=

Operating

income.

DISC

=

Disclosed,

but

not

recognized,

asset

value

estimates.

INVEST

=

Investments.

PPE

=

Property,

plant,

and

equipment.

INTAN

=

Intangible

assets.

COST

and

REVAL

denote

recognized

amounts

based

on

historical

cost

and

revaluation.

For

revalued

amounts,

DIRECTOR

and

INDEPENDENT

denote

whether

the

rec-

ognized

revalued

amount

is

based

on

a

directors'

or

independent

appraisers'

valuation.

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.

n

indicates

number

of

observations

with

nonzero

amounts

and

s.d.

denotes

standard

deviation.



17/36

214


each asset category.

t

revealsthatthemean (median) market-to-book a-

tio ranges from1.30 (0.99) forfinancialfirms o 3.01 (1.67) for mining

firms.

hese

statisticsndicatethat,

despite

asset

revaluations,

n

average,

sample firmshave net off-balance-sheet ssets. Untabulated statistics

reveal

that

for the

three samples

together, hare price, P. and the non-

market-based stimate of firm

value,

V

are highlypositively orrelated

(Pearson correlation

=

0.854).

Although

one

would expect a significant

positive

correlation

because both are measures

of

firm

alue,

the

differ-

ence in the source of the estimates

makes

the

correlation triking.

Table 2 reveals that revaluations

comprise a large fractionof recog-

nized amounts for all asset categories

and most nvestment evaluations

are based on directors'valuations. Revalued investment mounts most

frequently

re

based on current

valuations,although many mining and

nonfinancial firms' nvestment evaluationsare

more

than three

years

old.14

n

contrast, here are many

PPE

revaluations n

all age categories

for all three

industries.

Regarding

timing

of

revaluations,

untabulated

statistics

eveal that there

are many

PPE

revaluations

n

each

year

since

before 1981.

Although

some

investment evaluations lso

predate 1981,

there

are almostnone between 1981 and 1985.

Almost

no

intangible sset

revaluations

predate 1988.

Table 2 also reveals that manynonfinancial firms evalue intangible

assets,

but

no

mining

and fewfinancialfirms o

so.15

However,

because

mining

firms nclude

intangible

mineral

rights

n

PPE, some revalued

PPE

for

mining

firms elates to

intangible

assets.

Untabulated statistics

indicate

thatthe most

commonly evalued ntangible sset fornonfinan-

cial firms

s

brands. For these

firms,

evalued

intangibles

nclude brands

identified eparately:32%, brands,

patents,and licenses identified s a

group: 15%,

licenses

dentified

eparately: 3.5%, goodwill: 13.5%,

tech-

nologyassets: 12%, and other, ncluding executorycontracts:13.5%.16

Finally, able 2 reveals thatmost

revaluations re based on directors'val-

uations, except

forPPE

revaluations

or

nonfinancial nd financial

firms,

which

oftenare

based on

independent

valuations.17

14

Because

most

financial firms' investment revaluations that are based on directors' val-

uations 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 ta-

ble 5. The statistics in table 2 suggest that other revaluation partitions we investigate are un-

likely

to

be

driven

by

the

same observations.

15

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,

intan-

gible

asset

revaluations

relate

to

revaluing

intangibles

either

by recognizing internally gen-

erated

intangibles

or

changing

the

carrying

amount of

a

purchased intangible

asset.

16

The

distributions of

revalued

intangibles

are similar for the

large-

and

small-firm sub-

samples, although large

firms

have

a

greater percentage

of

revalued

goodwill

and

the

small

firms

have

a

greater percentage

of

revalued

brands and other

intangibles.

17

The

statistics in table

2

indicate

that

many

of the cost and

revaluation

amounts

have

skewed distributions. However, untabulated statistics reveal that rank correlations among



18/36

REVALUED FINANCIAL, TANGIBLE, AND INTANGIBLE

ASSETS 215

5. Findings fromPrice

and Non-Market-Based

Value

Regressions

5.1

MAJOR ASSET CLASSES

Table 3, panels A and

B,

present summary tatistics

rom estimating

(3)

and

(4) together

with

p-values

associated

with tests of equality of

coefficients. o mitigate ffects f extremeobservations,

we exclude ob-

servationswith estimated residuals greater

than three standarddevia-

tionsfrom ero. Also, we only estimate coefficient or

a

particular sset

partition

f the number of firmswith

nonzero

observations

or that

par-

tition xceeds five.

FollowingBarth and Kallapur [1996], we base all test

statistics n White [1980] standard errors.The termsignificantefers o

statistical ignificance t

a

levels ess than 5%, using a

one-sided

alterna-

tive,because we predictall

coefficientso be positive.

Tabulated findings

are based on estimating ll

equations pooled cross-sectionally

nd inter-

temporally; ntabulatedfindings rom eparate-year

stimations esult

n

similar nferences.

Looking first t the priceregression indings

n

table 3, panel A, we see

that revalued amounts

in all three asset classes are value

relevant; the

coefficients n

INVEST-REVAL, PEREVAL,

and INTANAREVAL

re

con-

sistently ositive,

s

predicted,

nd

significantly

ifferent

rom

ero.18As

expected, coefficients n most other independent variables

are signifi-

cantlypositive. The

exceptions are

those on

intangible

asset cost-based

amounts,

NTANi

COST

for

miningfirms,

nd otherdisclosed but

not rec-

ognized value estimates,

ISC,

for nonfinancial

firms.

The

p-values

associated

with

tests

of coefficient quality reveal that

the null

hypothesis

hat all

balance

sheet coefficients re equal is re-

jected, except

for

mining firms, ndicating

that not all

components

of

book value of equityhave the same value multiple.Similarly,estsgen-

erally reject the

null

hypotheses

that all

-COST

coefficients

re

equal,

whereas

equality

of all JREVAL

oefficients

s

rejected

only

for

non-

financialfirms. ests comparing

coefficients n cost-based and revalua-

tion-based amountsrejectequality only

for nonfinancialfirms'

PE and

intangible assets, suggesting

that

in

most cases investors do

not dis-

tinguish

cost- and revaluation-based

mounts

for

investments

r 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.

18

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 vari-

ables 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 NI includes revaluations

recognized

in

earnings, RIPJPL,

e

reestimated

the table 3

specifications

defining

NIas

net

income excluding RRIPL. Our inferences are unaffected.



19/36

TABLE 3

Summary tatisticsrom egressionfPrice,

,

and Non-Market-Basedstimate fValue,

V,

on

Income nd BookValue f quity artitioned yAssetClass and Valuation asis

Sample fPublicly radedAustralian irms rom

991 to 1995

Panel A: Price as Dependent Variable

Nonfinancial Mining Financial

Variable Coef. t Coef.

t

Coef.

t

Intercept 0.40 3.16 0.19 2.32 0.81 7.09

BV 1.34 12.20 1.24

6.48 0.68

5.27

NI 2.65

3.83 1.95 2.66

3.85

5.68

DISC -0.37 -0.70 3.39

3.84 0.78

7.32

COST

-INVEST

1.03 5.13 1.40 3.46 0.26 2.33

-PPE

1.45 13.15 1.37

9.77 0.41

2.15

-INTAN 1.18 7.17 -0.24 -0.23 1.41 2.45

REVALUATION

-INVEST

1.22 5.52

1.37

3.03 0.33

6.23

-PPE

0.59

2.71

1.42 5.82

0.55

1.91

-INTAN

0.65 7.85

n 347

268

195

Adj.

R2 0.808

0.872 0.932

p-Values

for

Tests

of

Coefficient

quality

Coefficient

est Nonfinancial

Mining

Financial

All Balance Sheet 0.00 0.55

0.00

All -COST 0.06 0.31 0.00

All REVAL 0.03

0.92

0.44

INVEST

-COST

and _.REVAL 0.52 0.96 0.44

PPECOST and

-REVAL

0.00 0.84

0.74

INTANCOST and _REVAL

0.00

Panel

B:

Non-Market-Based

alue Estimate as

Dependent

Variable

Nonfinancial

Mining

Financial

Variable

Coef. t Coef.

t

Coef.

t

Intercept 1.86 7.07 0.28

2.73 1.83 3.95

BV 0.61 4.51 0.43 4.07 0.52 2.08

NI

2.46 3.36 1.75

3.92

1.81 2.43

DISC -0.19 -0.56 0.45

0.83 -3.65 -1.69

COST

_INVEST

-0.39 -1.06

0.42

1.95

0.22

1.03

.PPE

0.94 7.96 0.66

7.91 1.47 1.97

-INTAN

-0.27

-0.96 -0.35

-0.64 3.07

3.42

REVALUATION

_INVEST

0.82 2.82

3.34

3.69 -0.07 -0.36

....PPE

-0.64

-2.58

1.09

7.22

-0.17

-0.26

-INTAN 0.35 2.19

n

184

129

67

Adj.

R2

0.684 0.909

0.748

p-Values

for

Tests

of

Coefficient

quality

Coefficient

est

Nonfinancial

Mining

Financial

All

Balance Sheet 0.00

0.00

0.00

All

-COST

0.00

0.07

0.01

All REVAL 0.00

0.01 0.88

INVEST

-COST

and

_.REVAL

0.04 0.00

0.20

PPEMCOST nd

_REVAL

0.00 0.01

0.20

INTANCOST and _REVAL 0.04

Pis

share rice

s of fiscal

ear-end.

is

non-market-based

stimate

f

firm

alue,

ased

on

present

valueof

IIBIEIS

analysts'arnings

orecasts.

V s

book valueof

equity

fter

ubtracting

nvestments

(INVEST), roperty,lant,

nd

equipmentPPE),

and

ntangible

ssets

INTAN).

NIis

operating

ncome.


20/36

REVALUED FINANCIAL, TANGIBLE, AND

INTANGIBLE ASSETS

217

TABLE 4

Summary Statistics romRegression

of Price, P.

on

Income

and

Book Value

ofEquity

Partitioned

byAsset Class and Valuation Basis

Sample of Publicly Traded Australian

Firms

from 1991 to

1995

Nonfinancial

Mining Financial

Variable

Coef.

t Coef. t

Coef.

t

Intercept 0.37

3.08 0.19

2.19 0.86 7.55

BV 1.35

13.25

1.20 5.86 0.23 2.21

NI 2.45

3.98 1.90 2.68

5.12 8.25

DISC

-0.27 -0.47

3.65 4.56

0.50 4.94

COST

-ASSOCLINVEST

0.00 0.00

1.97 3.07

0.73 2.16

-LISTED-INVEST

1.31

6.08 1.39 3.02

0.52

5.07

-PROP-PPE 1.32 5.01 1.31 7.77 -0.40 -0.92

-P&E.YPE

1.50 13.01

1.44 9.11 0.85 5.56

-GDWL-INTAN

1.86 4.90 -4.83 -3.50

-0.10 -0.13

-VARIED-INTAN

1.10 5.85

2.27 3.92 2.08

7.09

REVALUATION

-ASSOCLINVEST

0.46 0.92

1.59 3.18

-LISTED-INVEST

1.22 5.61

0.99 2.23 0.26 5.32

-PROP-PPE

0.38 1.69 -1.51

-1.52

-0.52 -1.78

-P&E-PPE

0.91 1.40 2.19 5.32

-6.20 -4.93

-VARIEDiINTAN

0.85

5.28

n 346 268 197

Adj.

R2

0.832

0.884

0.947

p-Values

for Tests of Coefficient

Equality

Coefficient Test

Nonfinancial

Mining

Financial

All

Balance Sheet 0.00

0.00

0.00

ASSOC

INVEST_

COST and JREVAL 0.60 0.68

LISTED

INVEST_

COST

and

_

REVAL

0.78

0.53

0.00

PROP PPE..COST and

_ REVAL 0.00

0.00

0.82

P&E

PPE&COST and _REVAL 0.38

0.08

0.00

VARIED

INTAN_

COST

and

_REVAL

0.35

P

is share

price

as

of fiscal

year-end.

BV s

book

value of

equity

after

ubtracting

nvestments

INVEST),

property, lant,

and

equipment (PPE),

and

intangible

ssets

(INTAN).

NI

is

operating

ncome.

DISC

is dis-

closed,

but

not

recognized,

ssetvalue estimates.ASSOC

LISTED)

denotes

associated

companies

(listed

nvest-

ments);

PROP

(P&E)

denotes

property plant

and

equipment);

GDWL

VARIED)

denotes

goodwill

(varied

intangibles).

COST and REVAL enote

recognized

amounts

based

on

historical ost

and

revaluations.

All vari-

ables

are

deflated

by

number of

shares

outstanding.

Data limitations

reclude

estimation

f

coefficients

or

each asset

partition.

oefficients

re

only

stimated

f

there

re

nonzero observations or

more than five irms.

Findings reported

n section

5.2 below,

where

we

partitionby

asset sub-

class,

ndicate that

the

rejections

of coefficient

quality

n

table 3

are at-

tributable

o

property,

n

the case of

PPE,

and

goodwill,

n

the

case

of

intangible

ssets.

If

we turnnext

to the

findings

rom

he

non-market-based

stimate

of

firm

alue,

V,

regression,

able

3, panel B,

reveals

that,

because

calculat-

ing

V

requires

analyst coverage

and

earnings forecasts,

he

sample

is

less

than one-half as

large

as

the

price regression

ample.

Nonetheless,

regarding

revalued

amounts,

there are

only

three

inconsistencies

be-

tween the findingsbased on price and V Specifically, ornonfinancial



21/36

218


firms, evalued PPE is significantly

egatively ssociated with V but sig-

nificantly ositively ssociated with

price. For financial firms, evalued

investments nd revalued PPE are

insignificantlyssociated with V but

significantlyssociated withprice. Testscomparingcoefficientsn panel

B

reject equality more frequently han

is the case for

the

price regres-

sions in panel A.

In section 8.1 we

report findings

from

estimating 3) separately

for

the

large and smaller sample

firms.

irms

with analystcoverage,

which

comprise the sample in table 3, panel

B,

are comparable

to the

larger

firm ample in section 8.1. Findings

reported

there for the

larger firms

are

consistentwiththose reported

n

table

3, panel

B.

This

suggests

hat

the inconsistenciesbetween the table 3, panel A and panel B findings

are attributable o differences n

firm

ize across

the

two

samples,

not

to

differences

n the

dependent variables,P and

V

Thus,

the

table

3, panel

B

findings ndicate that mplications

for

futureprofitability

f

revalued

assets are

reflected

n

non-market-based stimates

of firm

alue

and

in

share

prices.

5.2

ASSET

SUBCLASSES

In

this

section, we investigate

further

he potential

for

differential

value relevance across asset classes bydisaggregating ach major asset

class into

two subclasses. EEH's findings lso motivate his ection's anal-

ysis.

Because

more

of EEH's

sample

firms evalue property

han other

assets,

one

interpretation

f their

findings s

that

their

value relevance

finding

for revaluations

primarily

s

attributable

o

property.

Our find-

ings ndicate this

s

not thecase forour

sample,

n that nvestments'

nd

intangible ssets' revalued amountsare

significantlyssociated with hare

prices

and

estimates f future

rofitability.owever,

n

section 5.1

we

ag-

gregateproperty nd plant and equipment; n this ection,we investigate

separately

ts two

subclasses.19

Table 4

presents results from

estimating 3) but disaggregating

n-

vestments nto

investments

n

associated companies

and

other,primarily

listed, nvestments; PE into property,

rimarily

and and

buildings,

nd

plant and equipment; and intangibleassets nto goodwill and other

in-

tangibles.

Bernard

[1993] leads

us

to

expect

that nvestments

n

associ-

ated

companies, plant

and

equipment, and

other

intangible

assets

are

more likelyto be associated with firms'futureprofitabilitynd, thus,

share

prices,

than

listed

nvestments,roperty,

nd

goodwill.

Findings

n

table 4

reveal that,

as

expected,

revalued

investments

n

listed

companies

are

significantly

ssociated

withprices

for all

three

n-

dustries.

However,

revalued

investments

n

associated

companies

are

only

value relevant or

mining

firms.

lso, revalued property

s

only

mar-

19

Property (plant

and

equipment)

revaluation

findings

are based on

253 (98),

88

(82),

and 60 (16) observations f

Documents

JAR Revalued Tangibles and Intangible Assets Association with Share Prices and Non Market Based Value Estimates.pdf