Managerial Incentives Behind Fixed Asset Revaluations: Evidence from New Zealand Firms

Abstract

This study investigates the underlying management incentives of the upward fixed asset revaluation behaviour of New Zealand listed companies over the period 1999 to 2003. Prior research conducted in Australia (e.g. Whittred and Chan, 1992; Brown et al., 1992) and the U.K. (e.g. Lin and Peasnell, 2000a and 2000b) provided empirical evidence that upward fixed asset revaluation decisions were used to reduce contracting costs, political costs and information asymmetry. This study provides evidence to support the findings of earlier research with regard to the political costs only. That is, larger firms are found to be more likely to revalue their assets in order to mitigate political costs. In addition, this study finds that most revaluation activities of New Zealand companies were conducted regularly by independent valuers. It also finds that some companies choose to disclose current values of fixed assets in notes to their accounts rather than recognising them in their financial statements. It is argued that a perceived benefit of disclosing rather than recognising these current values is a more conservative and, therefore, more credible balance sheet (Cotter, 1999).