Journal of Applied Accounting Research

Incentives for fixed asset revaluations: the UK evidence

George Emmanuel Iatridis George Kilirgiotis
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George Emmanuel Iatridis George Kilirgiotis, (2012),"Incentives for fixed asset revaluations: the UK
evidence", Journal of Applied Accounting Research, Vol. 13 Iss 1 pp. 5 - 20
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Incentives for
Incentives for fixed asset fixed asset
revaluations: the UK evidence revaluations
George Emmanuel Iatridis
Department of Economics, University of Thessaly, Volos, Greece, and
5
George Kilirgiotis
Greek Yellow Pages, Athens, Greece Received June 2011
Accepted June 2011
Abstract
Purpose – The purpose of this paper is to examine the incentives for fixed asset revaluation. The
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motives that are investigated include firm size, fixed asset intensity, firm foreign operations and
acquisitions, firm indebtedness and earnings management inclination.
Design/methodology – The study utilises logistic and linear regressions to test the hypothetical
relations set up in the study. The categorisation of sample companies into those that perform asset
revaluations and those that do not is based on the examination of firms’ annual reports.
Findings – The findings of the study provide evidence that firm size is positively related to fixed
asset revaluation. Firms with foreign operations, with low fixed assets, and with high debt capital
needs are more likely to perform fixed asset revaluations. This is also the case for firms that carry out
acquisitions. The study also shows that fixed asset revaluation is negatively related to earnings
management.
Research limitations/implications – Firms that revalue their fixed assets should examine the
signals that are likely to be conveyed to investors about their managerial ability and financial
prospects. Firms would tend to revalue their fixed assets when it is likely to result in maximum
favourable financial consequences. Future research should investigate the possible opportunism in
firms’ behaviour, as well as the stock market reaction to fixed asset revaluations.
Originality/value – The paper is useful for investors and financial analysts, as it sheds light on the
motives for fixed asset revaluations. The reporting of asset values based on fair values would assist
them in making unbiased predictions about firms’ future performance. The paper gives insight about
the financial attributes of firms that perform fixed asset revaluations. For example, firms with capital
needs would be inclined to undertake a fixed asset revaluation in order to reinforce their financial
position.
Keywords United Kingdom, Fixed assets, Revaluation, Fixed asset revaluation, Financial leverage,
Acquisitions and mergers, Earnings management
Paper type Research paper

1. Introduction
It is evident that firms tend to revalue their fixed assets (Cotter and Zimmer, 2003;
Missonier-Piera, 2007). The incentives for fixed asset revaluation differ from firm to
firm. It is argued that opportunism may in certain cases drive the need for fixed asset
revaluation (Brown et al., 1992). Aboody et al. (1999) report that there is a positive
relation between asset revaluation and annual returns. Firms with high levels of debt
tend to revalue fixed assets in an effort to overcome debt restrictions or to reduce debt
costs (Brown et al., 1992; Courtenay and Cahan, 2004). Firms with foreign operations
may also perform fixed asset revaluations, in order to reinforce and facilitate their
financial prospects. Journal of Applied Accounting
Research
Vol. 13 No. 1, 2012
JEL classification — M41 pp. 5-20
r Emerald Group Publishing Limited
The authors would like to thank the former Editor of JAAR, Professor Kumba Jallow, and two 0967-5426
anonymous referees for their useful comments on previous drafts of the paper. DOI 10.1108/09675421211231871
 JAAR Lin and Peasnell (2000) claim that fixed asset revaluations may be costly. They
13,1 report that companies that revalue their fixed assets usually have a large number of
assets and are able to cover their financial needs. It is argued that the elapsed time
since the previous fixed asset revaluation may play a significant role when assessing
the effectiveness and the benefits of a revaluation (Lin and Peasnell, 2000).
Fixed asset revaluation may be used as a means of earnings management,
6 especially when the profit that occurs from a fixed assets sale is estimated on a
historical cost basis (Black et al., 1998). Firms may also be inclined to implement
upward revaluations so as to positively influence the value of their assets and financial
picture. Aboody et al. (1999) report that a positive correlation exists between upward
asset revaluations and a firm’s future financial performance. It follows, therefore, that
managerial decision making may be influenced by asset value considerations.
IAS 16 “Property, Plant and Equipment” states that revaluations must be carried
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out regularly in order to make sure that the carrying amount of an asset is not
materially different from the respective fair value at the end of the accounting year. The
increase in the value of an asset due to a revaluation must be taken to other
comprehensive income. If it constitutes a reversal of a revaluation decrease, then it
should be recognised in the income statement. According to IAS 36 “Impairment of
Assets”, a fixed asset must be subjected to regular impairment tests to ensure that the
carrying value does not exceed the recoverable amount. If the asset is carried at cost,
the impairment loss must be taken to the income statement, unless the asset has
previously been revalued. An impairment loss that is related to a previously revalued
asset must be accounted for as a revaluation decrease.
This study investigates the incentives that may motivate a firm to perform
fixed asset revaluations. It particularly examines whether fixed asset revaluation is
related with the size of a firm, and subsequently whether a large firm would be
more likely to revalue its fixed assets. The study also seeks to determine whether
firms revalue their assets in an effort to reinforce their financial numbers and
prospects. In addition, it assesses whether the issue of debt capital constitutes a
motive for firms to implement a fixed asset revaluation. The study also examines
whether firms that have foreign operations or make acquisitions are inclined to
perform fixed asset revaluations, in order to improve their asset-related figures and
financial picture. The study finally seeks to identify the relation between fixed asset
intensity and earnings management and the decision to carry out fixed asset
revaluations.
The structure of the study is as follows. Section 2 presents the literature review.
Section 3 discusses the research hypotheses. Section 4 presents the data and methods
used in the empirical analysis. Section 5 reports the empirical results, while Section 6
presents the conclusions of the study.

2. Fixed asset revaluations

Firms resort to upward revaluations in an effort to present a favourable financial
situation and attract investors and reinforce their investment opportunities (Missonier-
Piera, 2007). Firms tend to be eager to report upward revaluations but reluctant to
report downward revaluations, in which case they might argue that any downward
revaluations are temporary and not likely to occur in the future. Since an upward asset
revaluation can provide firms with the ability to equalise their book value with their
market value, it can be assumed that it may also reduce the possibility of undervalued
bids (Easton et al., 1993).
 Whittred and Chan (1992) find a significant relation between fixed asset revaluation Incentives for
and company size. Also, Abeysekera and Guthrie (2005) suggest that firm size can be a fixed asset
significant factor in explaining the provision of voluntary disclosures.
Large firms are visible in the capital market and would therefore be more likely to revaluations
disclose more information. Similar considerations would hold for firms that have
foreign operations and foreign financial exposure (Mubarak and Hassan, 2006). In
a similar vein, firms that operate internationally tend to provide higher levels of 7
disclosure, especially when they display higher debt ratios and need to report to their
creditors (Zarzeski, 1996).
Firms tend to revalue their fixed assets upward in an effort to overcome debt
limitations, obtain easier access to debt markets and avoid debt covenant violations
(Whittred and Chan, 1992; Cotter, 1999; Jaggi and Tsui, 2001). Fixed asset revaluation
may also lead to less restrictive debt covenants and debt costs and higher financial
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flexibility for firms (Black et al., 1998; Lin and Peasnell, 2000). Fixed asset revaluations
are considered as a low-cost way of facing underinvestment and liquidity problems
(Whittred and Chan, 1992). Fixed asset revaluations may also resolve situations,
whereby debt contracts restrict borrowing to a certain proportion of tangible fixed
assets, reducing thus the number of net positive value projects that could ultimately be
financed (Courtenay and Cahan, 2004). Whittred and Chan (1992) report that firms tend
to revalue their fixed assets in an effort to extend their borrowing capacity.
The incentives for fixed asset revaluation may differ from firm to firm ( Jaggi and
Tsui, 2001). Hence, the incentives driving high-debt firms to revalue their fixed assets
may differ from those of low-debt firms (Brown et al., 1992). Aboody et al. (1999) argue
that managers’ decisions may be influenced by asset value considerations, and provide
evidence of a positive relation between upward asset revaluations and firms’
performance. Opportunism may also urge firms to revalue their assets in order to
improve their financial picture and prospects. So, high-debt firms may be inclined to
manage their accounting numbers, in order to loosen their debt covenant constraints
and deal with underinvestment.

3. Research hypotheses
3.1 Firm size
Here, the study examines the relation between fixed asset revaluation and firm size.
Christoffersen et al. (2006) have found that a positive relation exists between company
size and revaluation disclosure. Mubarak and Hassan (2006) report that large and
foreign owned firms tend to provide more informative disclosures. Also, large firms
are visible in the market place and thus may use asset revaluations as a means to
reinforce their financial position and impress investors. Large companies have higher
levels of public demand for information than small firms. So, they would be inclined to
publicly reveal their asset revaluation actions (Abeysekera and Guthrie, 2005). The
hypothesis that is tested is as follows:

H1. Firm size is positively related to fixed asset revaluation.

The study splits the sample companies into small and large. The categorisation above
has been performed using the median of sales to total assets. In particular, firms have
been grouped into those with low sales to total assets (SALETAS) (90 firms), i.e. small
firms, and those with high sales to total assets (149 firms), i.e. large firms. The
empirical analysis focuses on the accounting period January-December 2007.
 JAAR To test H1, the binary logistic regression is utilised, using a dummy dependent
13,1 variable, which is dichotomous and takes 0 for firms with low sales to total assets and
1 for firms with high sales to total assets. Within the independent variables, the logistic
regression includes a dummy variable (FAR) that takes 1 for firms that performed
fixed asset revaluations and 0 for firms that did not. In total, 138 out of 239 sample
firms have revalued their fixed assets.
8
3.2 Foreign operations
Zarzeski (1996) has found that firms that revalue their fixed asset tend to provide
higher levels of disclosure in the international rather than in their domestic
marketplace. Similar considerations hold for firms with a wider level of foreign
operations, which require more capital, including foreign capital, in order to fulfil their
business and financial targets. Previous research has found a positive relation between
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companies with foreign operations and foreign listings and upward asset revaluations
(Mubarak and Hassan, 2006). Asset revaluations also tend to be accompanied by larger
disclosures. The hypothesis that is tested is as follows:

H2. Firms with foreign operations are likely to perform fixed asset revaluations.

Here, the study focuses on the entire sample of firms and splits them into those that
have foreign operations (i.e. 130 firms) and those that do not (i.e. 109 firms).
The categorisation is based on information obtained from firms’ financial
statements. The empirical analysis focuses on the accounting period January-
December 2007.
To determine the relation between foreign operations and asset revaluation,
the study uses the binary logistic regression, whereby the dummy dependent
variable takes 0 for firms without foreign operations and 1 for firms with foreign
operations. As in Section 3.1, the logit model has included a dummy variable (FAR)
within the independent variables that accounts for fixed asset revaluation and
distinguishes firms into those that performed fixed asset revaluations and those that
did not.

3.3 Fixed asset intensity

Fixed asset revaluation allows companies to show a lower debt ratio and enhance their
creditability, as a result of their higher asset value, and also to attract investors (Cotter
and Zimmer, 1995; Cotter, 1999; Lin and Peasnell, 2000; Jaggi and Tsui, 2001). Higher
asset values and lower-cost debt contracts can reinforce company liquidity levels
(Courtenay and Cahan, 2004). Fixed asset revaluations are considered as a low-cost
way of facing the underinvestment problem (Whittred and Chan, 1992). The hypothesis
that is tested is as follows:

H3. Firms with low fixed assets are more likely to perform fixed asset
revaluations.

To test H3, the study focuses on the entire sample of firms and categorises them into
those with high fixed assets (i.e. 142 firms) and those with low fixed assets (i.e. 97
firms). To determine whether firms have high or low fixed assets, the study has used
the median of fixed assets. The empirical analysis concentrates on the accounting
period January-December 2007.
 To determine the relation between fixed asset intensity and revaluations, the Incentives for
dummy dependent variable used in the logistic regression takes 0 for firms with high fixed asset
fixed assets and 1 for firms with low fixed assets. As in Section 3.1, a dummy variable
(FAR) is included in the model within the independent variables to account for firms revaluations
that performed fixed asset revaluations and firms that did not.

3.4 Financial leverage 9

Here, the study examines whether firms with high debt capital needs would be inclined
to perform fixed asset revaluations. Firms that display high-debt ratios and revalue
their fixed assets are likely to seek ways to reinforce their financial position and obtain
capital to finance their investment plans (Brown et al., 1992). High-debt firms would be
more likely to revalue their fixed assets, so as to abide by their debt covenants and
also be able to borrow further on better terms (Whittred and Chan, 1992). Upward fixed
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asset revaluations would allow firms to avoid possible penalties or repayment costs
that are associated with debt covenant violations. Similar considerations would hold
for firms facing liquidity and underinvestment problems (Brown et al., 1992). The
hypothesis that is tested is as follows:

H4. Firms with high debt capital needs are more likely to perform fixed asset
revaluations.

The empirical analysis focuses on the accounting period January-December 2007.

Here, the study splits the sample firms into those with higher debt capital needs,
i.e. firms with higher borrowings in 2007 as opposed to the previous year (160 firms),
and those with lower debt capital needs, i.e. firms with no new borrowings in
2007 (79 firms). To determine the relation between financial leverage and asset
revaluation, the dummy dependent variable used in the logistic regression takes
0 for firms with low debt capital needs and 1 for firms with high debt capital needs. As
in Section 3.1, a dummy variable (FAR) is included in the model within the independent
variables to account for firms that performed fixed asset revaluations and firms that
did not.

3.5 Acquisitions
A company is mainly identified via its asset composure, which determines its
investment strategy and future investment plans (Myers, 1977). Firms may reinforce
their investment strategy and growth potential through fixed asset revaluations.
Therefore, firms may resort to fixed asset revaluations as a means to finance and
realise possible acquisitions and/or reinforce the acquisition process (Brown et al.,
1992). The hypothesis that is tested is as follows:

H5. Firms that carry out acquisitions are more likely to perform fixed asset
revaluations.

Here, the study focuses on firms that have undertaken acquisitions (147 firms) and
those that have not (92 firms). The empirical analysis focuses on the period January-
December 2007. To determine the relation between acquisitions and fixed asset
revaluations, the dummy dependent variable used in the logistic regression takes 0 for
firms that have not undertaken an acquisition in the period under investigation and
1 for firms that have. As in Section 3.1, a dummy variable (FAR) is included in the
 JAAR model within the independent variables to account for firms that performed fixed asset
13,1 revaluations and firms that did not.

3.6 Earnings management

Here, the study seeks to determine the relation between the decision to revalue a
company’s fixed assets and earnings management. Fixed asset revaluations would
10 tend to reduce information asymmetry about the fair value of assets (see Nichols and
Buerger, 2002). As previously noted, managers would seek to reduce their financing
costs or reinforce their investment strategy and plans through upward revaluations,
and hence lower the company-related perceived risk. Black et al. (1998) argue that when
the profit that occurs from a fixed asset sale is estimated on a historical cost basis,
revaluations may be used to improve firms’ financial picture. The study hypothesises
that firms that resort to fixed asset revaluations to achieve business and financial
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objectives would be less inclined to use earnings management techniques. This would
vary depending on the impact and the effectiveness of the revaluation on company
accounting figures and future prospects. Alternatively, firms may choose to wait and
evaluate the outcome and benefits of fixed asset revaluation before altering their
strategy and trying different techniques. On the other hand, the use of earnings
management may be risky and bear negative consequences for a firm’s credibility and
market picture if known. Therefore, firms may refrain from using earnings
management, especially if they consider that the objectives of performing a fixed asset
revaluation have been or are likely to be met. Thus, the hypothesis that is tested is as
follows:

H6. Fixed asset revaluation is negatively related to earnings management.

To test H6, the study categorises the sample firms into firms with high discretionary
accruals (165 firms) and firms with low discretionary accruals (74 firms). This
categorisation is based on the median of discretionary accruals. The discretionary
accruals are estimated using the cross-sectional Jones model ( Jones, 1991). The study
uses the residuals of the following regression model as discretionary accruals
(see DeFond and Subramanyam, 1998; Bartov et al., 2001; Kothari et al., 2004;
Garza-Gomez et al., 2006):
ACi;t ¼ a0 ð1=Ai;t1 Þ þ a1 DREVi;t þ a2 PPEi;t þ ei;t ð1Þ
where ACi, t, is accruals in year t scaled by lagged total assets, i.e. total assets in year
t1. Accruals equal the annual change in current assets (excluding cash) minus
current liabilities (excluding short-term debt and income tax payable) minus
depreciation; Ai, t1, is total assets in year t1; DREVi, t, is the annual change in
revenues in year t scaled by lagged total assets; PPEi, t is property, plant and equipment
in year t scaled by lagged total assets; ei, t, is the error term.
The empirical analysis focuses on the period January-December 2007. In order to
capture the association between fixed asset revaluation and earnings management,
the study uses the logistic regression analysis, whereby the dummy dependent
variable takes 0 for firms with low discretionary accruals and 1 for firms with high
discretionary accruals. As in Section 3.1, a dummy variable (FAR) is included in the
model within the independent variables to account for firms that performed fixed asset
revaluations and firms that did not. As noted above, the study would expect to find a
negative relation between discretionary accruals and fixed asset revaluation.
 4. Research methodology Incentives for
Accounting and financial data has been collected from DataStream. Information on fixed asset
company accounting policies, such as on fixed asset revaluations, acquisitions, has
been collected from company annual reports, which have been made available by the revaluations
Financial Times Annual Report Service. All sample firms are listed on the London
Stock Exchange. The analysis has excluded banks, insurance, pension and brokerage
firms, as their accounting measures are not always comparable with those of industrial 11
firms. The period under investigation is January-December 2007. The study has sought
to obtain a one-to-one correspondence between firms available on the Financial Times
Annual Report Service and those on DataStream. This has reduced the sample size to
239 firms. Appendix 1 presents the industrial sector structure of the sample firms.
Appendix 2 shows the explanatory variables that are employed in the empirical analysis.
The study utilises the binary logistic regression analysis and the linear regression
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analysis. The logistic regression can explain the relation observed among a
dichotomous dependent variable and independent explanatory variables. The
dichotomous variable takes only two values, namely 0 or 1, e.g. firms that perform
fixed asset revaluations and firms that do not. The categorisation of sample companies
into those that perform asset revaluations and those that do not is based on the
examination of firms’ annual reports.

5. Empirical findings
5.1 Firm size
Table I demonstrates that H1 holds, implying that firm size is positively related to
fixed asset revaluation. Table I shows that large firms exhibit higher growth (MVBV)
and leverage, as expressed by the positive coefficients of long-term liabilities to capital
employed (LLCE), total liabilities to shareholders’ funds (TLSFU) and debt to
shareholders’ funds (DSFU). Large firms also tend to display higher earnings per share
(EPS) and return on capital employed (ROCE), and hence they demonstrate higher
interest coverage (INTCOV). Following their higher leverage commitments and
capital and investment needs, large firms tend to pay lower dividends (DIVSH) for
reinvestment purposes. Based on the findings presented above and the higher
long-term financial obligations, firms of large size and visibility would be inclined to
perform fixed asset revaluations. Table I indicates that large firms tend to perform
fixed asset revaluations, as expressed by the positive fixed asset revaluation dummy
variable (FAR), in order to reinforce their financial position and picture.

5.2 Foreign operations

The findings of the logistic regression presented in Table II indicate that H2 holds,
suggesting that firms with foreign operations are likely to perform fixed asset
revaluations. Table II shows that firms with foreign operations tend to be larger
(SALETAS) and to exhibit higher investment to total assets (INVTAS) and growth
(PEG). They also display higher leverage (IGEAR) and subsequently lower working
capital ratio (WCR). Despite the higher leverage, however, their earnings per share
(EPS) appears to carry a positive coefficient. It appears that firms with foreign
operations would need capital and resources to finance their foreign business projects,
and therefore, would be inclined to perform fixed asset revaluations, in order to
strengthen their financial prospects and situation. Indeed, as shown in Table II, the
fixed asset revaluation dummy variable (FAR) has been found positive, suggesting a
positive relation between firms with foreign operations and fixed asset revaluation.
 JAAR Large vs small firms
13,1 Variables Coefficients

FAR 5.300*
(3.090)
MVBV 0.094**
12 (0.136)
DIVSH 0.030*
(0.018)
EPS 1.066**
(0.521)
ROCE 5.050*
(2.933)
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DSFU 0.008*
(0.005)
LLCE 3.674**
(1.662)
INTCOV 0.535**
(0.271)
TLSFU 0.518**
(0.251)
Constant 2.066
(3.402)
Model w2 2.367*
% correctly classified 84.5**
Sample size N0 ¼ 90, N1 ¼ 149
Notes: ** and *Statistical significance at the 5 and 10 per cent level (two-tailed), respectively.
All the explanatory variables were entered/removed from the logistic regression using a step-wise
Table I. procedure with a p-value of 0.05 to enter and a p-value of 0.10 to remove. The Wald statistic was used
Firm size to test the null hypothesis that each coefficient is 0

5.3 Fixed asset intensity

Table III shows that H3 holds, implying that firms with low fixed assets are more
likely to perform fixed asset revaluations. Table III indicates that firms with low fixed
assets are smaller (NAVSH) and exhibit higher leverage (IGEAR). The higher financial
obligations have not adversely affected their operating profit margin (OPM) and cash
flow per share, which carry positive coefficients. Firms with low fixed assets appear to
exhibit a higher plowback ratio (PLOW) and subsequently to pay lower dividends
(DIVSH and DIVCOV) to shareholders in order to reinvest their profits and to meet
their financial commitments. Despite their lower fixed assets, they also exhibit higher
return on asset (ROA). This can be explained by the higher profitability that they
display and it implies that they make more intensive and efficient use of their fixed
assets. It follows that the lower fixed assets that they hold, the efficient use that they
make of them and the greater need for capital that they exhibit would urge firms with
low fixed assets to perform fixed asset revaluations. Table III shows that the fixed
asset revaluation dummy variable (FAR) has been found positive, suggesting a
positive relation between low fixed assets and fixed asset revaluation.

5.4 Financial leverage

Table IV shows that H4 holds, implying that firms with high debt capital needs are
more likely to perform fixed asset revaluations. The results of the logistic regression
 Firms with vs firms without foreign operations
Incentives for
Variables Coefficients fixed asset
revaluations
FAR 4.159***
(1.514)
SALETAS 0.049**
(0.025) 13
INVTAS 0.065**
(0.030)
PEG 3.978*
(2.287)
EPS 0.059*
(0.033)
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WCR 0.064**
(0.034)
IGEAR 0.012*
(0.007)
Constant 1.745
(1.438)
Model w2 1.897**
% correctly classified 87.8**
Sample size N0 ¼ 109, N1 ¼ 130
Notes: ***, ** and *Statistical significance at the 1, 5 and 10 per cent level (two-tailed), respectively.
All the explanatory variables were entered/removed from the logistic regression using a step-wise
procedure with a p-value of 0.05 to enter and a p-value of 0.10 to remove. The Wald statistic was used Table II.
to test the null hypothesis that each coefficient is 0 Foreign operations

presented in Table IV indicate that firms with high debt capital needs are larger
(SALETAS and RESTAS) and display higher growth (MVBV). Due to the high
financial obligations and the subsequent high financial charges, they tend to exhibit
lower profitability (ROCE) and liquidity (WCR). They also tend to retain their profits,
as shown by their higher plowback ratio (PLOW), and to distribute lower dividend
(DIVSH), as a means to strengthen their financial position. It follows that fixed asset
revaluations would assist firms that have high debt capital needs and are in a growth
area to meet their financial obligations and reinforce their growth prospects. Indeed,
Table IV shows that the fixed asset revaluation dummy variable (FAR) is positive,
suggesting a positive relation between leverage and fixed asset revaluation.

5.5 Acquisitions
Table V provides evidence that H5 holds, suggesting that firms that carry out
acquisitions are more likely to perform fixed asset revaluations. Table V shows that
firms that carry out acquisitions exhibit larger size (SALETAS) and higher growth
(DIVSHG). The higher profitability, i.e. operating profit margin (OPM) and return
on capital employed (ROCE), that they present would enable them to successfully
undertake their business expansions and acquisitions. They also display higher
liabilities to shareholders’ funds (TLSFU) and plowback ratio (PLOW), implying
that they would need more capital to carry out the acquisitions. It follows that firms
that carry out acquisitions would benefit from fixed asset revaluations, as the latter
would be expected to reinforce the acquisition process and ability of the firm. The fixed
 JAAR Firms with high vs firms with low fixed assets
13,1 Variables Coefficients

FAR 0.974*
(0.589)
NAVSH 1.378*
14 (0.775)
DIVSH 0.038*
(0.023)
DIVCOV 0.559**
(0.261)
ROA 5.956***
(2.289)
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OPM 1.097**
(0.523)
PLOW 0.974*
(0.589)
CFSH 1.688*
(0.968)
IGEAR 0.463*
(0.274)
Constant 1.723
(1.458)
Model w2 3.454**
% correctly classified 81.9*
Sample size N0 ¼ 142, N1 ¼ 97
Notes: ***, ** and *Statistical significance at the 1, 5 and 10 per cent level (two-tailed), respectively.
All the explanatory variables were entered/removed from the logistic regression using a step-wise
Table III. procedure with a p-value of 0.05 to enter and a p-value of 0.10 to remove. The Wald statistic was used
Fixed asset intensity to test the null hypothesis that each coefficient is 0

asset revaluation dummy variable (FAR) in Table V has been found positive,
suggesting a positive relation between acquisitions and fixed asset revaluation.

5.6 Earnings management

Table VI shows that H6 holds, implying that fixed asset revaluation is negatively
related to earnings management. Table VI indicates that firms with high discretionary
accruals tend to exhibit higher leverage (IGEAR), suggesting that the higher financial
obligations that they have would urge them to use earnings management in order to
abide by their debt covenants, improve their financial position and provide favourable
signals to lenders. The higher leverage appears to unfavourably affect company
liquidity (WCR) and EPS, which carry negative coefficients. It may also be that firms
are inclined to use earnings management in order to favourably affect their
profitability and liquidity figures.
Firms of large size (SALESHA) appear not to display high discretionary accruals,
as they are visible and the use of earnings management would attract public attention
and would subsequently affect their market picture unfavourably. Firms with high
discretionary accruals tend to exhibit high-growth potential (PEG), suggesting
that they would resort to earnings management in order to facilitate and enhance their
growth prospects. Also, following their higher leverage and lower profitability, they
display lower interest cover (INTCOV). Inability to meet debt covenants and lenders’
 Firms with high vs firms with low debt capital needs
Incentives for
Variables Coefficients fixed asset
revaluations
FAR 0.055***
(0.015)
SALETAS 0.049**
(0.025) 15
RESTAS 0.008**
(0.003)
MVBV 5.195**
(2.661)
DIVSH 0.996*
(0.593)
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ROCE 1.319*
(0.753)
PLOW 2.191*
(1.278)
WCR 3.915**
(2.076)
Constant 0.220
(0.084)
Model w2 1.901***
% correctly classified 88.9*
Sample size N0 ¼ 79, N1 ¼ 160
Notes: ***, ** and *Statistical significance at the 1, 5 and 10 per cent level (two-tailed), respectively.
All the explanatory variables were entered/removed from the logistic regression using a step-wise
procedure with a p-value of 0.05 to enter and a p-value of 0.10 to remove. The Wald statistic was used Table IV.
to test the null hypothesis that each coefficient is 0 Financial leverage

contractual arrangements would lead a firm into a situation of financial distress,

possibly encouraging therefore the use of earnings management. Table VI also shows
that the fixed asset revaluation dummy variable (FAR) is negative, implying that the
relation between earnings management and fixed asset revaluation is negative.

6. Conclusions
The study focuses on UK firms and investigates the motives for performing fixed asset
revaluations. The study explores the relation between fixed asset revaluation and size,
foreign operations, fixed asset intensity, leverage, acquisitions and earnings
management. The findings show that fixed asset revaluation would tend to
favourably affect firms’ financial plans and position.
Large and financially visible firms exhibit higher growth and capital needs, and
would therefore tend to perform fixed asset revaluations in order to reinforce their
financial position and market picture. Firms that have foreign operations generally
tend to be larger and to exhibit higher growth and leverage, suggesting that they
would be inclined to perform fixed asset revaluations, in order to strengthen their
financial prospects and undertake their foreign business projects. Firms with low fixed
assets are smaller and exhibit higher ROA and greater need for capital, since they
borrow more and retain their earnings, which would urge them to perform fixed asset
revaluations. Firms with high debt capital needs retain their earnings, while they
generally display higher growth and lower profitability. The findings show that they
 JAAR Firms with vs firms without acquisitions
13,1 Variables Coefficients

FAR 0.012*
(0.007)
SALETAS 0.031*
(0.017)
16 DIVSHG 0.051*
(0.028)
ROCE 0.476***
(0.202)
OPM 0.312*
(0.184)
PLOW 0.495**
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(0.245)
TLSFU 0.406*
(0.220)
Constant 0.251
(0.182)
Model w2 2.209*
% correctly classified 88.9*
Sample size N0 ¼ 92, N1 ¼ 147
Notes: ***, ** and *Statistical significance at the 1, 5 and 10 per cent level (two-tailed), respectively.
All the explanatory variables were entered/removed from the logistic regression using a step-wise
Table V. procedure with a p-value of 0.05 to enter and a p-value of 0.10 to remove. The Wald statistic was used
Acquisitions to test the null hypothesis that each coefficient is 0

Firms with high vs firms with low discretionary accruals

Variables Coefficients

FAR 0.057*
(0.032)
SALESHA 0.009*
(0.005)
PEG 1.275*
(0.780)
EPS 0.011***
(0.005)
IGEAR 0.049**
(0.023)
WCR 0.032*
(0.020)
INTCOV 0.221***
(0.089)
Constant 0.267
(0.333)
Model w2 5.741**
% correctly classified 85.9*
Sample size N0 ¼ 74, N1 ¼ 165
Notes: ***, ** and *Statistical significance at the 1, 5 and 10 per cent level (two-tailed), respectively.
All the explanatory variables were entered/removed from the logistic regression using a step-wise
Table VI. procedure with a p-value of 0.05 to enter and a p-value of 0.10 to remove. The Wald statistic was used
Earnings management to test the null hypothesis that each coefficient is 0
 perform fixed asset revaluations to strengthen their financial position and growth Incentives for
prospects. Firms that carry out acquisitions are larger and exhibit higher capital needs, fixed asset
while they perform fixed asset revaluations to reinforce their acquisition process.
Firms that use earnings management tend to exhibit higher borrowing and lower revaluations
liquidity, profitability and interest cover, suggesting that they would possibly be
inclined to manage their earnings in order to improve their accounting figures and
market picture. The study also shows that the relation between earnings management 17
and fixed asset revaluation is negative, implying that firms that perform fixed asset
revaluations to influence their financial numbers would be less likely to manage their
earnings, at least not before assessing the outcome of the revaluation and evaluating
whether the related financial targets have been met.
The findings of the study are useful for investors and financial analysts, as they
shed light on the motives for fixed asset revaluations. The reporting of asset
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values based on fair values would assist them in making unbiased predictions about
firms’ future performance. Market authorities, however, should be able to ensure the
credibility and quality of the reported financial numbers. The study also gives insight
about the financial attributes of firms that perform fixed asset revaluations. For
example, firms with capital needs would be inclined to undertake a fixed asset
revaluation in order to reinforce their financial position. Information about what
drives firms to revalue their fixed assets is vital and will assist in better understanding
firms’ inner financial objectives and strategy.
Firms that revalue or are about to revalue their fixed assets should examine the
impact of fixed asset revaluations on their financial numbers as well as the signals
that are likely to be conveyed to investors about their managerial ability and company
financial prospects. Firms would tend to time the execution of fixed asset revaluations
in order to influence their financial performance and to suit their needs. Therefore,
it appears that the timing of performing fixed asset revaluations is subject to the
financial goals of firms. Firms would tend to revalue their fixed assets when it is likely
to result in maximum favourable or minimal adverse financial consequences.
Future research should concentrate in the determination of the appropriate timing
and formula of undertaking fixed asset revaluations as well as in the investigation of
the content and usefulness of revaluation-related information that is conveyed in
company annual reports. Subsequently, future research should also investigate the
possible opportunism and earnings management inclination within firms’ behaviour
as well as the stock market reaction to fixed asset revaluations. Future research
would finally benefit by distinguishing between firms that willingly choose to revalue
their assets and firms that following the requirements of IAS 16 would have to carry
out revaluations anyway, in which case the decision for revaluation would not have
been managers’ free choice, but a regulatory obligation.

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 Appendix 1 Incentives for
Industry Number of firms
fixed asset
revaluations
Aerospace and defence 5
Construction and building materials 24
Chemicals 6
Electronics 18 19
Energy solutions and services 5
Engineering and machinery 12
Equipment and services 17
Food and beverages 36
Health care 6
Innovative and technological solutions 25
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Media and entertainment 5

Mining 11
Oil and gas 13
Personal care and household products 26
Pharmaceuticals and biotechnology 16
Retail 11
Utilities 3 Table AI.
Total 239 Sample industrial sectors

Appendix 2

Size
NAVSH Net asset value per share
RESTAS Reserves to total assets
SALESHA Sales per share
SALETAS Sales to total assets
Dividend
DIVCOV Dividend cover
DIVSH Dividend per share
Growth
PEG Price to earnings growth
MVBV Market value to book value
DIVSHG Dividend per share growth
Profitability
EPS Earnings per share
PLOW Plowback (retention) ratio
ROA Return on total assets
OPM Operating profit margin
ROCE Return on capital employed
Liquidity
CFSH Operating cash flow per share
WCR Working capital ratio
Leverage
DSFU Debt to shareholders’ funds
INTCOV Interest cover
LLCE Long-term liabilities to capital employed
IGEAR Income gearing
TLSFU Total liabilities to shareholders’ funds
Other variables Table AII.
FAR Fixed asset revaluation dummy variable: it takes 1 for firms that performed fixed Accounting measures
asset revaluations in the period under investigation and 0 for firms that did not used as explanatory
INVTAS Investment to total assets variables
 JAAR About the authors
George Emmanuel Iatridis is an Assistant Professor of Accounting and Finance at the
13,1 Department of Economics, University of Thessaly, Greece. He also is a member of the Greek
Accounting and Auditing Oversight Board, Ministry of Economics. He has worked as a Lecturer
in Accounting and Finance at the School of Accounting and Finance, University of Manchester,
UK and also taught at the University of Athens and the University of Manchester Institute of
20 Science and Technology (UMIST). He studied Accounting and Finance at postgraduate level at
the Universities of Manchester (PhD) and Southampton (MSc). Before graduate school, he
studied Economics at the University of Athens, Greece. George has worked on a number of
international research projects relating to financial accounting. He teaches on postgraduate
programmes and serves on the editorial advisory boards of various academic journals. His
current research interests mostly relate to the economic consequences of the implementation of
international financial reporting standards in the UK and other major European and non-
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European countries, accounting policy choice, earnings quality and earnings conservatism.
George Emmanuel Iatridis is the corresponding author and can be contacted at:
giatridis@econ.uth.gr

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