A study of asset revaluations by listed companies in Hong Kong

Abstract

This study sets out to identify the financial characteristics of companies that revalue assets and investigates whether there is a relation between asset revaluations and share market reactions. Finally, it aims to examine the association between asset revaluations and future firm performance. There are in total 526 listed companies (2,445 firm-year observations) in the final sample. The study covers five year's data from 1994 to 1998. Consistent with prior studies in Australia, I find that companies are more likely to revalue their assets when their leverage is high and their cash flows from operations are in decline. In addition, large and profitable companies and companies with a higher proportion of fixed assets are also more likely to undertake asset revaluations. The study reveals that there is a positive and significant association between upward asset revaluations and the Hang Seng Properties Price Index. Finally, companies in the property industry are more likely to state their fixed assets at open market value than at historical cost. The study also provides strong evidence that asset revaluations are value relevant to investors for making decisions. The results reveal that there is a significant and positive relation between asset revaluations and share prices. Generally, companies revaluing their assets at the time when the value of the assets change. Asset revaluations are significantly and positively associated with annual stock returns. Another important finding shows that there is a significant and positive relation between current year asset revaluations and future changes in operating income. I cannot, however, find a significant association between asset revaluations and another proxy for future firm performance which is measured by future change in cash flows from operations. The study concludes that the major financial characteristics for companies undertaking asset revaluations are high leverage, lower cash flows from operations, high profitability, and high fixed asset intensity. Asset revaluations are value relevant and they are positively related to the future firm operating performance.