Demand For Fair Value Accounting The Case of The Asset Revaluation

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Demand for fair value accounting: The case of the asset revaluation boom in
Korea during the global ﬁnancial crisis
Article in Journal of Business Finance & Accounting · July 2017

DOI: 10.1111/jbfa.12266
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DOI: 10.1111/jbfa.12266
Demand for fair value accounting: The case of the

asset revaluation boom in Korea during the global
financial crisis
Choong-Yuel Yoo1 Tae Hee Choi2 Jinhan Pae3
1 Korea Advanced Institute of Science and
Technology (KAIST) College of Business Abstract

2 KDI School of Public Policy and Management When the fair value accounting (FVA) option for property, plant, and
3 Korea University Business School equipment was introduced in the midst of the global financial crisis,
Correspondence a significant proportion of Korean firms elected FVA. We attribute
Jinhan Pae, Professor of Accounting, Korea this unusual boom in asset revaluations to the nation’s culture of
University Business School, 145 Anam-Ro, government intervention and civilian compliance, which was partic-
Seongbuk-Gu, Seoul, Korea.
Email: jinhanpae@korea.ac.kr
ularly espoused during this period of financial turmoil, and a foresee-
Funding information
able option to switch back to historical cost accounting. We find that
Korea University Business School Grant among those firms whose debt-to-equity ratios are low, public firms
2014 KAIST Internal Research Grant opt for the FVA option more often than private firms, suggesting
that the need to communicate fair value information with diversified
equity holders is more important than the need to do so with credi-
tors. In contrast, among those firms whose debt-to-equity ratios are
high enough to warrant such unfavorable dispositions as new debt
freezes and monitoring by regulators, we find no difference in the
FVA choice between private and public firms. These findings imply
that during the global financial crisis, private firms that rely heavily
on debt financing have a strong incentive to utilize FVA to comply
with government guidelines for the debt-to-equity ratio and to ease
a potential hold-up problem by influential creditors.
KEYWORDS
asset revaluation, early adoption, IFRS, policy, private firms
1 INTRODUCTION
Asset revaluation is a formal procedure by which firms update the carrying amount of an asset to the fair value. Fair
value accounting (FVA) has been widely accepted for financial instruments in recent years, but generally accepted
accounting principles (GAAP) in the United States and international financial reporting standards (IFRS) differ in their
positions on the adoption of FVA for non-financial assets. Whereas both US GAAP and IFRS mandate the recognition
of the decline in value through the impairment test requirement for fixed assets, only IFRS, not US GAAP, allows for
the appreciation in value through asset revaluation. In a setting in which the need to increase book values of assets and
92
c 2017 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/jbfa J Bus Fin Acc. 2018;45:92–114.
YOO ET AL . 93
equities is substantial due to the global financial crisis, we investigate whether privately held and publicly traded firms
react differently to the FVA option for property, plant, and equipment (PP&E).
Prior studies suggest that firms revalue PP&E to improve their financial position and to signal their future prospects
and financial healthiness (Brown, Izan, & Loh, 1992; Whittred & Chan, 1992; Easton, Eddey, & Harris, 1993; Cotter &
Zimmer, 1995; Gaeremynck & Veugelers, 1999; Lin & Peasnell, 2000; Barlev, Fried, Haddad, & Livnat, 2007). Except for
Gaeremynck and Veugelers (1999), who examined private Belgian firms, the extant literature on asset revaluation has
mostly focused on public firms. Accordingly, no existing study before ours has examined the differences in asset reval-
uation between private and public firms. We argue that private firms differ from public firms in their propensity and
incentives to revalue PP&E, partly because of their differing demands for fair value information regarding contracting
and investment decision-making. Prior studies show that private firms differ from public firms in many aspects, one
of which is on financial reporting incentives (e.g., Burgstahler, Hail, & Leuz, 2006; Hope, Thomas, & Vyas, 2013). For
instance, Penno and Simon (1986) and Cloyd, Pratt, and Stock (1996) find that whereas public firms are more con-
cerned about increasing reported earnings, private firms’ primary concern is to reduce taxes. It has also been alleged
that in private firms, financial statements play a relatively less important role than they do in public firms because the
financial statements of private firms are not widely distributed to the public (Ball & Shivakumar, 2005; Peek, Cuijpers,
& Buijink, 2010; Szczesny & Valentincic, 2013).
We conduct our comparative analysis of asset revaluation between public and private firms in a Korean setting
because of the following advantages. First, in Korea, the financial reporting data necessary to investigate asset reval-
uation are widely available for both public and private firms. Furthermore, both private and public Korean firms
are subject to the same corporate tax rates and financial reporting regulations, including the external audit require-
ment (Kim & Yi, 2006; Choi, Pae, Park, & Song, 2013). Thus, a sample of Korean firms makes it possible to focus on
the differences in the ways private and public firms use general-purpose financial statements in explicit and implicit
contacts.
Second, Korea provides a good venue for a comparative study due to its unique circumstances resulting in a rela-
tively high number of apparent asset revaluation cases (17.9% of public firms and 14.6% of private firms in Panel A,
Table 1). The asset revaluation boom among Korean firms contrasts with the scarcity of the FVA choice following IFRS
adoption in Europe: only 2–5% of German and UK listed firms choose the FVA option for PP&E (Christensen & Nikolaev,
2013).
Finally, Korea provides an opportunity to investigate how firms react to the introduction of the FVA option for fixed
assets prior to the full adoption of IFRS. In 2008, as an attempt to facilitate a smooth transition to the 2011 mandatory
adoption of IFRS, the Korean Accounting Standard Board (KASB) selectively revised local accounting standards for
PP&E in accordance with International Accounting Standard 16: Property, Plant and Equipment (IAS 16). This early, partial
adoption (IAS 16, paras 39 and 40) of IFRS creates a quasi-experiment that enables us to pinpoint the exact year that
firms revalued their PP&E and, furthermore, to focus on the impact of the single item of IFRS on managers’ choices in
order to revalue PP&E while isolating the effects of other items of IFRS.
In our comparative analysis of asset revaluation between public and private firms, we note the difference in their
sources of financing. Unlike private firms, which usually get financed through bank debt or relationship loans, pub-
lic firms rely more on public debt or equity because they have easier access to the capital markets and need greater
amounts of capital. Whereas public financing creditors (e.g., bond issuers) are more likely to rely on information from
public sources, prospective creditors of a private firm are often in a position to directly ask the firm to provide infor-
mation relevant to their lending decisions (Ball & Shivakumar, 2005; Peek et al., 2010). Consequently, for the cur-
rent and prospective creditors of private firms, published financial statements are less likely to be the main source of
information.
Given the above difference in information channels between private and public firms, we argue that for pub-
lic firms, asset revaluation is an efficient way to convey reliable information through publicly disclosed general-
purpose financial statements – because private provision of fair value information would be inefficient or impossible.
However, in the case of private firms, a relatively smaller number of creditors makes it easier to convey fair value
information privately. Hence, our initial prediction is that private firms are less likely to revalue PP&E than public
94 YOO ET AL .
firms because private firms can convey fair value information privately to stakeholders without formally revaluing
assets.
Consistent with this prediction, we initially observe that when the accounting standard setter in Korea allowed
the FVA option, private firms opted for PP&E revaluation less often than public firms. However, once we control for
the endogeneity of listing status and factors influencing asset revaluations, we do not find such a difference between
private and public firms. Our additional analysis reveals that the result of no difference between private and public
firms has been attributable mainly to those firms that rely heavily on debt financing. In contrast, among firms with
relatively low debt, we find that, consistent with our initial conjecture, public firms are more likely to revalue PP&E than
private firms. We conclude the following: (i) the communication needs with dispersed equity holders are pronounced
only when the debt-to-equity ratio is low, and (ii) highly leveraged private firms are as likely to utilize FVA as public
firms to comply with the government guideline for the debt-to-equity ratio and to ease a potential hold-up problem by
influential creditors during a credit crunch.
Our paper contributes to several streams of research. First, we contribute to research on asset revaluation. Most
extant research limits its analysis to asset revaluations by public firms (e.g., Brown et al., 1992; Easton et al., 1993;
Cotter & Zimmer, 1995; Cotter & Richardson, 2002; Barlev et al., 2007; Christensen & Nikolaev, 2013), and no study,
to the best of our knowledge, examines differences in asset revaluation between private and public firms. Utilizing
Korean data that encompass both public and private firms’ reactions to IFRS adoption, we fill this void in the litera-
ture. Our results indicate that revaluations can provide useful fair value information to dispersed shareholders. Our
interpretation contrasts with the view that firms utilize revaluations mainly to reduce their debt-to-equity ratio.
Second, we contribute to research on the consequences or effects of IFRS adoption (e.g., Ahmed, Neel, & Wang,
2013; He, Wong, & Young, 2012) or convergence between US GAAP and IFRS (e.g., Barth, Landsman, Lang, & Williams,
2012; Chen & Sami, 2013). US GAAP and IFRS use a similar definition of fair value, but they differ in their scope
with regard to permitting the fair value measurement. We show that the demand for the fair value information for
non-financial assets is not trivial and varies conditionally on ownership concentration and contractual/institutional
environments.1 Specifically, we document that (i) private firms revalue their PP&E less frequently than public firms
when they do not rely heavily on debt financing, but (ii), during a period of financial turmoil, highly leveraged private
firms do not differ from public firms in their demand for fair value accounting.
Finally, we offer some practical implications for policy makers and standard setters. A firm’s accounting choices
interact with the institutional environment in which the firm operates (e.g., a financial crisis, policy goals, and capital
structure). Specifically, we trace economic forces and institutional environment attributable to the asset revaluation
boom in Korea.
The remainder of the paper is organized as follows. The next section provides a brief summary of asset reval-
uation procedures in Korea, a literature review, and empirical hypotheses. Section 3 explains our research design.
Section 4 explains the sample selection procedure and provides the descriptive statistics. Empirical results are pre-
sented in Section 5. Finally, Section 6 summarizes the results and discusses their policy implications.
2 BACKGROUND AND HYPOTHESIS DEVELOPMENT
2.1 Accounting rules for asset revaluation

The revised Korean accounting standard for PP&E is similar to International Accounting Standard 16: Property, Plant and
Equipment (IAS 16). Firms initially recognize PP&E at the historical cost, and then for subsequent valuation, they sepa-
rately choose either the historical cost accounting (HCA) option or the FVA option for each class of PP&E. Depreciation
and impairment losses are applicable regardless of the option chosen for the subsequent valuation. Once they adopt
1 In the context of banks, Bischof, Daske, and Sextroh (2014) document that analyst demand for fair value-related information varies over time, across analysts,
and across fair value topics.

YOO ET AL . 95
the FVA option, firms are required to regularly update the carrying amount of PP&E to the fair value and then base the
subsequent depreciation and impairment losses on the revalued amount.
Below are IAS 16 paras 39 and 40, which prescribe accounting rules for changes in the carrying amount as a result
of an asset revaluation.
39 If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognised in
other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the
increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset
previously recognised in profit or loss.
40 If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit
or loss. However, the decrease shall be recognised in other comprehensive income to the extent of any credit bal-
ance existing in the revaluation surplus in respect of that asset. The decrease recognised in other comprehensive
income reduces the amount accumulated in equity under the heading of revaluation surplus.
The way IAS 16 recognizes revaluation increments and decrements is asymmetric: revaluation increments are
reported directly to equity, whereas revaluation decrements are reported on the income statement. A consequence
of this asymmetric treatment is that firms cannot increase current reported earnings through the revaluation of PP&E;
however, if there is a revaluation decrement to recognize, reported earnings will decrease. It should also be noted
that the upward revaluation of depreciable assets reduces future reported earnings due to the increased depreciation
charges.
Asset revaluation for PP&E is not a requirement but an option. The accounting standard for PP&E under IFRS gives
revaluing firms latitude in terms of the timing, frequency, and scope of the revaluation. That is, firms electing the FVA
option are required to revalue items with sufficient regularity to ensure that the carrying amount does not differ mate-
rially from the fair value at the end of the reporting period. However, it does not require annually updating the carrying
amount of PP&E. When there are no significant and volatile changes in fair value, revaluations may be necessary every
three or five years (IAS 16, para. 34).
2.2 Asset revaluation in Korea

Asset revaluation has never been a permanent part of Korean accounting standards. In the past, the fate of asset reval-
uation as a financial reporting option was mostly determined by the government’s policy considerations. For exam-
ple, the government allowed firms to claim more depreciation expenses based on current value in their tax filings,2 to
increase legal capital, or to mitigate equity depletion without issuing new shares. Most recently, asset revaluation was
temporarily allowed under the Asset Revaluation Act in the wake of the 1997 Asian financial crisis (until 2000).
Between 2001 and 2008, Korean firms were deprived of the revaluation option. At the end of 2008, however, the
KASB revised local accounting standards related to PP&E, allowing firms to adjust the book value of PP&E to fair value.
The 2008 accounting revision is the first time that the adoption of asset revaluation has not been accompanied by a
revision of the local tax codes.3
The 2008 re-introduction of asset revaluation was made in the midst of KASB’s decision to enforce the mandatory
adoption of IFRS in 2011. The KASB presumed that the voluntary adoption of asset revaluation for PP&E would facil-
itate a smooth transition to IFRS and make financial statements of Korean firms more comparable to those of firms
2 Firms were required to pay taxes for revaluation increments when they adjusted the carrying amount of an asset to a higher current value. In return, sub-
sequent depreciation of the asset was based on the updated current value. Future tax savings due to the increased depreciation base were generally greater
than the amount of the revaluation tax.
3 Asset revaluation rules under IFRS differ from those stipulated in the Asset Revaluation Act. Most notably, the appreciation of asset values based on IFRS
is not recognized under the tax law, so there is no benefit of saving future taxes through increased depreciation expenses. Consistent with no associated
tax benefit, many firms revalued only “land” (according to our analysis in Exhibit 4, among 271 public firms that revalue at least one class of PP&E, 99.6%
revalue land). Furthermore, while the now revoked Asset Revaluation Act allowed only an upward revaluation, the asset revaluation under IFRS allows both
revaluation increments and decrements. However, the new accounting standard requires that once firms decide to revalue their assets, they revalue all items
in the chosen class of PP&E. Accordingly, in some cases, firms may be forced to recognize a revaluation decrement – although their primary motivation for
PP&E revaluation is to recognize increments in value.
96 YOO ET AL .
from the countries that had already adopted IFRS or allowed asset revaluation in their local accounting standards (e.g.,
Australia, New Zealand, and member states of the European Union). Korean firms responded to the re-introduction of
the revaluation option with enthusiasm. According to our data, 17.9% of public firms and 14.6% of private firms (see
Panel A, Table 1) revalued their PP&E for the accounting periods that ended between December 31, 2008 and March
31, 2009. The boom of asset revaluations in Korea sharply contrasts with the scarcity of the FVA choice following
IFRS adoption in Europe: only a small proportion of the UK and German listed firms adopted the FVA option for PP&E
(Christensen & Nikolaev, 2013). We argue that there exist some unique features of our research setting attributable to
the unusual asset revaluation boom in Korea.
First, as we have witnessed in the wake of the 1997 Asian financial crisis, Korea has a long legacy of government
intervention and firms’ compliance with the government’s policies in a cooperative manner.4 Specifically, on November
30, 2008, former Finance Minister Lee Hun-Jae called for some drastic measures to address the economic challenges
that Korean firms faced (Sa, 2008). Between December 2008 and January 2009, the Financial Services Commission
(the central government body responsible for financial policy and financial supervision), the Financial Supervisory Ser-
vice (the specially legislated quasi-government supervisory authority), and the KASB (the accounting standard setter)
held a series of joint press conferences and issued several policy measures to help financially distressed Korean firms
cope with the global financial crisis. These policy measures included the FVA option, an option to report foreign cur-
rency transactions in the functional currency (IAS 21), and other hedge accounting issues. In their December 22, 2008,
joint press release (FSC, 2008), the three agencies stated that the newly available accounting choices were needed to
allay widespread concerns over the negative impact of massive realized and unrealized foreign exchange losses, subse-
quent credit rating downgrades, increased debt redemption, higher financial charges, and new credit freezes.
Note that unlike the settings of prior studies (e.g., Gaeremynck & Veugelers, 1999; Lin & Peasnell, 2000; Christensen
& Nikolaev, 2013), we examine the adoption of FVA when it is newly available in the midst of a financial crisis. During
the global financial crisis of 2007–08, many Korean firms suffered from the deterioration of profitability, a shortage
of working capital, and high interest rates. To make matters worse, they had difficulties raising capital through equity
financing. Debt financing was a viable financing option but very costly. Thus, an increase in book values of assets and
equities through asset revaluation could have been an attractive option for many financially distressed firms to the
extent that improved financial conditions, while only cosmetic on the books, can facilitate financing with more favorable
terms or elicit less intense monitoring by the government (see Exhibit 1 for one of the Big Three credit rating agencies’
responses to asset revaluation in Korea).
Accounting Professor Kwang-Yoon Kim, who is a former president of the Korean Accounting Association, expressed
his concern over the aforementioned policy measures in a newspaper column on January 29, 2009, “it is like the gov-
ernment institutionalizes the nation-wide window dressing in Korean firms’ financial statements.”5 Exhibit 2 shows a
list of firms whose debt-to-equity ratios improved the most owing to PP&E revaluation. The debt-to-equity ratio of
4 A testimony on government intervention in the nation’s capital market is seen in the first paragraph of the Memorandum on the Economic Program between
the South Korean government and the International Monetary Fund in December of 1997 in the midst of the 1997 Asian financial crisis (retrieved on July 25,
2017, from https://www.imf.org/external/np/loi/120397.htm):
At the same time, in the process of development, the limitations of Korea’s system of detailed government intervention at the micro level have
become increasingly apparent. In particular, the legacy of government intervention has left an inefficient financial sector and a highly leveraged
corporate sector that lack effective market discipline.
Further, an example of civilian compliance is seen in a newspaper article regarding the asset revaluation boom under the Asset Revaluation Act in the wake of
the 1997 Asian financial crisis (until 2000):
The nation’s top-five conglomerates, or chaebols, have actively implemented asset revaluation and in-kind investment lately, in an effort to comply
with the government’s demands that their respective debt ratios be reduced to under 200 percent by the end of 1999. Indeed, a chaebol lobby
agency said that the average debt ratio of Hyundai, Samsung, Daewoo, LG and SK fell to 285.4 percent at the end of 1998 from 470.1 percent in
1997, due in large part to their asset revaluation and investment in kind (The Korea Herald, March 9, 1999).
5 In fact, a market strategist at Samsung Securities described the boom in asset revaluation in Corporate Korea as follows:
an asset boost through an asset revaluation brings positive effects of improvement in corporate financial structure on a declined debt ratio as well as
a fall in the price book value ratio (PBR) (Kim, 2010).
YOO ET AL . 97
EXHIBIT 1 Excerpts from press releases of a bond rating firm
Panel A: Response to a publicly-traded firm’s asset revaluation.

Moody’s changes Meritz Insurance’s rating outlook to negative
12 March 2009 Moody’s Investors Service Press Release
c 2009
Moody’s Investors Service has changed the rating outlook of Meritz Fire & Marine Insurance Co Ltd (MFM) to negative
from stable. At the same time, Moody’s has affirmed the firm’s A3 insurance financial strength rating.
Moody’s also notes that the difficult market conditions somewhat limit MFM’s financial flexibility in regard to its ability to
raise additional funds, in case of need.
Moody’s affirmation is based on the fact that MFM continues to meet its solvency requirements comfortably with a
significant asset revaluation gain – allowed by Korean accounting standards over the short term. Besides, other than its
refund guarantee exposure, its underwriting performance remains in line with Moody’s expectations.
Panel B: Response to a privately-held firm’s asset revaluation.
Moody’s changes Kyobo Life’s outlook to negative
3 March 2009 Moody’s Investors Service Press Release
c 2009
Moody’s Investors Service has changed the rating outlook of Kyobo Life Insurance Firm Ltd (Kyobo Life) to negative from
stable. At the same time, Moody’s affirms its A2 insurance financial strength (IFS) rating.
Moody’s affirmation of the A2 IFS rating is based on Kyobo Life’s ongoing strong position in the Korean life insurance
market and its well-diversified product portfolio. Moody’s also notes that a significant asset revaluation gain – allowed
by Korean accounting standards – will likely help improve its solvency margin ratio to around 200% by end-FY2008, a
level well above the regulatory minimum. In addition, the firm has adequate liquidity to meet its liabilities and to repay
KRW 92.5 billion in subordinated debt due April 2009.
EXHIBIT 2 Top ten firms in terms of debt-to-equity ratio improvement by asset revaluation
Revaluation Change in Debt-to-equity

amount (unit: debt-to-equity ratio after asset
Rank Company name 100m KRW) ratio revaluation
1 Asiana Airlines Inc. 3,252 +556% 695%
2 C&Woobang Construction Co., 630 +497% 116%
Ltd.
3 Korea Refractories Co., Ltd. 241 +203% 232%
4 Daewoo Shipbuilding & Marine 7,976 +118% 365%
Engineering Co., Ltd.
5 Tongyang Major Inc. 445 +112% 501%
6 Daelim B&Co 952 +100% 53%
7 Hi-Steel Co., Ltd. 624 +83% 79%
8 Dongil Rubber Belt Co., Ltd. 842 +80% 84%
9 Kyungbang Co., Ltd. 3,430 +77% 92%
10 Korea Gas Corporation 9,283 +76% 344%
Asiana Airlines Inc. decreased from 1,251% to 696%, and that of C&Woobang Construction decreased from 613% to
116% after asset revaluation. Still, despite the favorable effect of asset revaluation on the debt-to-equity ratio, the
average debt-to-equity ratio of Korean firms rose by 14.9 percentage points from 114.9% in 2007 to 129.8% in 2008.6
Exhibit 3 provides the growth rates of asset items for all Korean firms (and for manufacturing firms only). Owing to the
asset revaluation boom in 2008, the average growth rate in the book values of land is unusually high compared with
the preceding years (29.7% in 2008 vs. 5.1% or less in 2007 and earlier years). In response to the criticism that many
6The debt-to-equity ratio of German firms was stable around the nation’s adoption of IFRS on December 31, 2005 (the complete set adoption as opposed to
Korea’s selected item adoption of IAS 16). The average debt-to-equity ratio of German firms was 257.1% in 2004, followed by 232.0% in 2005 and 241.9% in
2006 (source: Deutsche Bundesbank, Ratio from financial statements of German enterprises).
98 YOO ET AL .
EXHIBIT 3 Growth rate of assets and components: all industries (the manufacturing sector)
Growth rate (Unit: %) 2004 2005 2006 2007 2008

Total assets 6.7 8.3 8.3 11.8 16.2
(8.0) (9.4) (8.1) (13.6) (19.1)
Tangible assets 3.8 4.6 5.2 4.9 14.4
(4.8) (6.2) (6.0) (4.9) (15.5)
Land 2.5 4.4 4.3 5.1 29.7
(1.4) (3.4) (3.1) (6.0) (34.1)
Buildings & structures 4.5 5.5 3.3 3.8 7.4
(3.9) (6.9) (5.4) (5.9) (8.5)
Machinery & equipment 2.4 3.7 4.0 3.1 7.5
(3.2) (6.8) (7.1) (3.2) (2.5)
Source: Bank of Korea, Financial Statement Analysis for 2008
firms revalued fixed assets opportunistically during the fiscal year 2008, the KRX mandated the disclosure of asset
revaluations in April 2009.
Next, unlike settings of other FVA studies, Korean firms’ voluntary adoption of asset revaluation in 2008 was
unlikely to be an ex-ante commitment to the FVA option over the HCA option. Rather, it was more like an ex-post oppor-
tunistic choice because of the de facto option to switch back to HCA upon IFRS adoption in 2011. At the end of 2008, it
had already been decided that publicly accountable firms were to make a transition to IFRS by 2011. The KASB selec-
tively revised local accounting standards for PP&E in accordance with IAS 16, first as an attempt to facilitate a smooth
transition to the 2011 mandatory adoption of IFRS and second, at the same time, as part of the government’s policy
measures to help financially distressed Korean firms cope with the global financial crisis (FSC, 2008). Thus, those who
elected FVA in 2008 were aware of the option to go back to HCA in 2011 when they adopted the entire set of IFRS.
In fact, most of the revaluation firms switched back to HCA when they later adopted IFRS, indicating that their choice
of FVA in 2008 was opportunistic.7 Similarly, UK firms used the mandatory IFRS adoption as an opportunity to switch
back to HCA (Christensen & Nikolaev, 2013).8 Thus, our setting is different from Christensen and Nikolaev (2013), who
examine an ex-ante commitment to revalue assets when firms adopt IFRS.
2.3 Prior research on asset revaluation

As US GAAP does not allow the revaluation for PP&E, extant studies on asset revaluation have examined firms in other
countries, such as Australia, Belgium, and the UK. These studies suggest that most firms revalue fixed assets to improve
their financial position, reduce contracting and political costs, and signal future operating prospects (Brown et al., 1992;
Whittred & Chan, 1992; Easton et al., 1993; Cotter & Zimmer, 1995; Gaeremynck & Veugelers, 1999; Lin & Peasnell,
2000; Barlev et al., 2007; Choi et al., 2013).
Asset revaluation entails direct and indirect costs. The direct costs include actual out-of-pocket costs (e.g., appraisal
fees, increase in audit fees charged by the auditors, or record-keeping costs), whereas the indirect costs are mainly
opportunity costs, such as the time and effort managers spend in selecting items to revalue, the reviewing of the fair
values of the chosen items, and the discussion of these values with auditors (Brown et al., 1992; Henderson & Goodwin,
1992). In addition, asset revaluations are also costly with respect to performance evaluation. Increases in assets and
7 According to The Korea Economic Daily (in Korean), among 57 firms that adopted IFRS early in 2009 and 2010, no firms had chosen the FVA option for PP&E.
8 The following are excerpts from Christensen and Nikolaev (2013): “44% of the firms that used fair value under UK GAAP switched to historical costs upon
the IFRS adoption” (p. 744), and “The costs of switching accounting principles include renegotiating contracts (which require consistency in GAAP), convincing
auditors that the new practice better reflects the underlying economics of the company, and communicating and justifying the change to financial statement
users. Most of these costs are fixed (i.e., they are independent of the number of accounting principle changes), so the incremental cost of voluntary changes is
lower when combined with a mandatory change such as IFRS adoption” (p. 752).
YOO ET AL . 99
equity resulting from asset revaluations lead to a decrease in the return on assets or equity (ROA or ROE), each of
which is a commonly used performance measure.
Published financial statements are often used by regulatory bodies as a monitoring device to oversee publicly
accountable firms. For example, government agencies (i.e., the FSC and the FSS) use the debt-to-equity ratio of 200% to
identify financially distressed, risky firms (Kwak, 1999, Lee, 2013) and impose new debt freezes and close monitoring
on financially distressed firms.
In examining the IFRS adoption of the UK and Germany, Christensen and Nikolaev (2013) report that only a small
proportion of firms (5% for the UK and 3% for Germany) elected the FVA option for fixed assets in the first year
after the mandatory IFRS adoption, interpreting higher market demands for HCA over FVA. Our study is related
to Christensen and Nikolaev (2013) in that we examine the impact of IAS 16 adoption on FVA choices but dif-
fers in the following important ways. First, whereas Christensen and Nikolaev examine the UK and German firms’
ex-ante commitment to FVA, Korean firms’ choice of FVA in 2008 is likely to be opportunistically temporal, as dis-
cussed in Section 2.2. Next, whereas “market forces” determine the outcome of the infrequent FVA in the Chris-
tensen and Nikolaev setting, the “government intervention” during a financial crisis leads to the FVA boom in our
setting. In Section 2.5, we discuss how firms react differently to demands for fair value information as regards con-
tracting, investment decision-making and the government policy goal, conditional on the level of their reliance on debt
financing.
2.4 Listing status and financial reporting practice

Prior studies investigate the impact of listing status on accounting choices (Penno & Simon, 1986; Cloyd et al., 1996),
on earnings management (Beatty, Ke, & Petroni, 2002; Burgstahler et al., 2006; Kim & Yi, 2006), and on conditional
conservatism (Ball & Shivakumar, 2005; Nichols, Wahlen, & Wieland, 2009; Peek et al., 2010). Our study is distinct
from the extant studies on the relation between listing status and financial reporting practices in the following ways.
First, in our Korean setting, firms are unlikely to revalue PP&E for tax benefits because the appreciation of asset values
based on IFRS is not recognized under the tax law.
Second, revaluations cannot increase current earnings but rather can only decrease current (e.g., revaluation decre-
ments) or future (e.g., increased depreciation base) earnings. Thus, Korean firms are unlikely to engage in earnings man-
agement through asset revaluation.
Finally, Ball and Shivakumar (2005) argue that public firms are more likely to resolve information asymmetry
between managers and other parties (such as creditors, shareholders, suppliers, and customers) via publicly available
financial statements. However, unlike public firms, private firms can efficiently communicate relevant information with
the stakeholders on a more private “insider” basis. The demand for high quality financial reporting is thus lower for pri-
vate firms than for public firms. Consistent with the above argument, Ball and Shivakumar (2005) find that UK private
firms report losses in a less timely manner than public firms. Nichols et al. (2009) also document that US private banks
tend to recognize losses in a less timely fashion than public banks.
2.5 Empirical hypotheses

Firms can use asset revaluation as a means to convey their private fair value information about PP&E through public
financial statements. The owners of private firms often consist of a small group of people who are already involved in
management or who personally know the management team (Trostel & Nichols, 1982; Kim & Yi, 2006). Thus, lenders
are already likely to know the ins and outs of the private firm or be in a position to ask for the inside information relevant
to their lending decisions. Accordingly, published financial statements are a less important information source for the
stakeholders (i.e., shareholders and creditors) of private firms than they are for those of public firms. That is, private
firms can communicate relevant information to stakeholders privately, using a so-called “insider access” model (Ball
& Shivakumar, 2005; Peek et al., 2010). In contrast, public firms are more likely to use public communication through
financial statements because there are numerous shareholders. All things considered, we predict that, ceteris paribus,
100 YOO ET AL .
private firms are less likely than public firms to communicate fair value information about PP&E using costly, formal
asset revaluation.
H1: Private firms are less likely than public firms to revalue PP&E.
In Korea, the government has been using the debt-to-equity ratio of 200% as “the policy goal” (e.g., Lim, 2010) and as
a critical reference to identify financially distressed, risky firms (Kwak, 1999, Lee, 2013) since the Asian financial crisis
in the late 1990s. Highly leveraged firms have been subject to several disadvantages, such as new debt freezes and close
monitoring of their financial conditions by regulatory bodies (e.g., the FSC and the FSS). Specifically, during the global
financial crisis, there was widespread fear about a credit crunch and serial bankruptcy. Accordingly, it would have been
much harder for private firms with few lenders to renegotiate debt contracts because lenders can more easily hold up
during a crisis (Rajan, 1992).9 Thus, we conjecture that if private firms fail to meet the government-set guideline of a
200% debt-to-equity ratio, their bargaining power with creditors weakens. Further, as many of Korean firms revalued
assets during the Asian financial crisis in the late 1990s, firms are likely to be well aware of the benefits of asset reval-
uation, such as lowering debt-to-equity ratios. Therefore, we expect that firms with debt-to-equity ratios of 200% or
more are highly likely to utilize FVA as a useful means to comply with the minimum leverage guideline, regardless of
their listing status (i.e., asset revaluation is as important for those highly leveraged private firms as for public firms).
In contrast, for firms that have less concern about meeting the government guideline of a 200% debt-to-equity ratio,
the benefits of asset revaluation, such as improvement of the leverage ratio and an abatement of the hold-up prob-
lem by lenders, would be limited. Hence, to the extent that direct and indirect costs associated with asset revaluation
(e.g., appraisal fees, managers’ time and effort, and subsequent decreases in ROA or ROE) are substantial, FVA would
be a less attractive option for private firms than for public firms. In summary, we predict that during the global finan-
cial crisis, the influence of listing status is rather obscure for firms with debt-to-equity ratios above 200%, whereas
it is conspicuous for firms with debt-to-equity ratios below 200%. This leads to our second hypothesis concerning
the effect of the degree of reliance on debt financing on the propensity to revalue PP&E between public and private
firms:
H2: During the global financial crisis, the influence of listing status on firms’ asset revaluation choice (i.e., H1) is atten-
uated when firms rely heavily on debt financing such that their debt-to-equity ratios fail to meet the government
guideline of 200%.
3 RESEARCH DESIGN
3.1 Effect of asset revaluation

Because we are interested in the factors that affect a firm’s propensity to revalue PP&E, we need to identify the firm’s
financial condition and other data prior to revaluation. Following Choi et al. (2013), we compute the effect of revalua-
tion on total assets (or PP&E), liabilities, equity, and net income as follows:
Increase in total assets or PP &E = [(after-tax) revaluation increment∕(1 − deferred tax rate)]
− (before-tax) revaluation decrement.
Increase in liabilities = [(after-tax) revaluation increment∕(1 − deferred tax rate)]

× deferred tax rate − [(before-tax) revaluation decrement × deferred tax rate].
9 We are very grateful to an anonymous reviewer for pointing out this perspective.
YOO ET AL . 101
Increase in equity = (after-tax) revaluation increment − [(before-tax) revaluation decrement

× (1 − deferred tax rate)].
Decrease in net income = (before − tax) revaluation decrement × (1−deferred tax rate).
Note that whereas the revaluation increment is reported on an after-tax basis in the statement of financial position,
the revaluation decrement is reported on a before-tax basis in the income statement. We use the deferred tax rate of
22%, which is the anticipated corporate tax rate for future periods at the end of 2008.10
3.2 Model for the choice of asset revaluation

To evaluate the determinants of asset revaluation, we estimate the following probit regression model (1), patterned
after the model of Choi et al. (2013):11
RevDi = 𝛽0 + 𝛽1 Leveragei + 𝛽2 ROAi + 𝛽3 NegCFODi + 𝛽4 LossDi + 𝛽5 (ROAi × LossDi )
+ 𝛽6 EqDepletDi + 𝛽7 PP & ERatioi + 𝛽8 Sizei + 𝛽9 PastRevDi + 𝜀i , (1)
where RevD is an indicator variable for firms that revalued PP&E (the definition of the independent variables is
included in the Appendix). For revaluing firms, we adjust for the effect of revaluation as explained in the previous
subsection.
Equation (1) is our base model for the propensity to revalue PP&E. To compare the differences in the propensity to
revalue PP&E between private and public firms, we augment Equation (1) with an indicator variable for private firms
(PrivateD or PD) and interaction terms as follows:
RevDit = 𝛽0 + 𝛽1 PrivateDit + 𝛽2 Leverageit + 𝛽3 ROAit + 𝛽4 NegCFODit + 𝛽5 LossDit
+ 𝛽6 (ROAit × LossDit ) + 𝛽7 EqDepletDit + 𝛽8 PP&ERatioit + 𝛽9 Sizeit + 𝛽10 PastRevDit
+ 𝛽11 (Leverageit × PDit ) + 𝛽12 (ROAit × PDit ) + 𝛽13 (NegCFODit × PDit )
+ 𝛽14 (LossDit × PDit ) + 𝛽15 (ROAit × LossDit × PDit ) + 𝛽16 (EqDepletDit × PDit )
+ 𝛽17 (PP&ERatioit × PDit ) + 𝛽18 (Sizeit × PDit ) + 𝛽19 (PastRevDit × PDit ) + 𝜀it (2)
H1 predicts that private firms are less likely to revalue PP&E than public firms. Thus, we expect a negative coefficient
for PrivateD (i.e., H1: 𝛽 1 < 0).
H2 predicts that when firms rely heavily on debt financing, asset revaluation is as important for private firms as for
public firms because those highly leveraged firms, regardless of their listing status, have an incentive to comply with the
government’s guideline for the debt-to-equity ratio (below 200%) and to avoid intense monitoring by regulatory bod-
ies. Further, highly leveraged private firms with few influential lenders may choose the FVA option to ease a potential
hold-up problem by creditors. To test the second hypothesis, we partition the sample into high-leverage firms (those
with debt-to-equity ratios of 200% or above) and low-leverage firms (those with debt-to-equity ratios below 200%) and
re-estimate Equation (2) in each subsample. We expect that the coefficient for PrivateD is significantly negative for the
low-leverage sample but insignificant or less significant for the high-leverage sample (i.e., H2: 𝛽 1 < 0 for low-leverage
firms, but 𝛽 1 = 0 for high-leverage firms).
10 For the tax year 2010, and later at the end of 2008, 22% was the anticipated corporate tax rate for taxable income exceeding 200 million Korean won
(approximately US$0.2 million). Choi et al. (2013) infer the deferred tax rate for Korean public companies by dividing the deferred tax liability associated with
the revaluation increment by the sum of the after-tax revaluation increment and the associated deferred tax liability. They find that most of the inferred rates
are 22%.
11 While our model is similar to that of Choi et al. (2013), we do not include the market-to-book ratio because no stock price exists for private firms.
102 YOO ET AL .
3.3 Controlling for listing status

The listing status of a firm is not determined randomly. To the extent that factors influencing the listing status
of a firm also affect its PP&E revaluation decision, failure to control for the endogenous selection of going pub-
lic or remaining private will influence our inferences about the impact of the listing status on the choice of asset
revaluation. Thus, we control for the endogenous nature of the listing status by estimating the following probit
regression model of the choice of being private (PrivateD) along with our main probit model of the choice of PP&E
revaluation:
PrivateDit = 𝛽0 + 𝛽1 Sizeit−1 + 𝛽2 Leverageit−1 + 𝛽3 QuickRit−1
+ 𝛽4 ExportRit−1 + 𝛽5 SalesGit−1 + 𝛽6 FirmAgeit−1 + 𝜀it . (3)
Following Ball and Shivakumar (2005) and Kim and Yi (2006), we include firm size (Size), leverage, the quick ratio
(QuickR), the ratio of exports to total sales (ExportR), and sales growth (SalesG). Because we expect private firms to be
smaller, utilize more debt, have a weaker liquidity, rely less on exports, and experience lower growth, we predict nega-
tive coefficients on Size, QuickR, ExportR, and SalesG12 and a positive coefficient on Leverage.13 In addition, we include
firm age (FirmAge) because public firms are on average more established than private firms. Because a firm’s choice of
listing status in year t is likely to be affected by the value of these variables in year t – 1, these explanatory variables are
measured as of year t – 1, as in Kim and Yi (2006).
4 SAMPLE SELECTION AND DATA
We collect accounting data for industrial firms from TS2000, which is a financial information database maintained by
the Korea Listed Firms Association. When firms adjust the carrying amount of PP&E as a result of asset revaluation,
multiple financial statements are affected. In the case of a revaluation surplus, the difference between the book value
and the fair value of PP&E is reported in the equity section of the statement of financial position and in the liability
section as a deferred tax liability. In contrast, a revaluation loss is reported on the statement of income. We identify
revaluing firms as those with a positive balance in the revaluation surplus on the statement of financial position or
those with a non-zero revaluation loss in the statement of income.14 We identify 2,178 (271 public and 1,907 private)
firms that revalued some of PP&E items for the accounting period ending December 31, 2008 (fiscal year 2008 is the
first year that firms were allowed to revalue PP&E under the recently revised accounting standard for PP&E). For 271
public firms that revalue at least one class of PP&E, we review their annual reports and determine what classes of
PP&E are revalued. Exhibit 4 shows that, except for one firm, all public revaluing firms revalue land. Forty-three firms
revalue more than one class of PP&E. This result is in line with Exhibit 3, indicating that the growth rate of land (29.7%
for all industries and 34.1% for manufacturing firms) is higher than that of other tangible assets (building, structure,
machinery & others).
We classify a firm as a public firm if its shares are listed on the KRX. Private firms are those that are not listed on the
KRX but that are subject to a mandatory external audit. Korean firms are required to have their financial statements
audited by an independent external auditor if total assets at the beginning of the accounting period are seven billion
12 Trostel and Nichols (1982) predict that private firms will focus less on sales growth than public firms. However, their empirical results suggest the contrary:
sales growth rates are higher for private firms than for public firms (14.6% vs. 9.6%, Table 2 of Trostel and Nichols). They argue that CEOs of private firms place
more emphasis on sales growth as a decision criterion than do those of public firms.
13 Our prediction on Leverage is consistent with what Kim and Yi (2006) report in their study. They find that private firms utilize more debt than public firms,
contrary to what they originally expected (Panel A of Table 7 in Kim & Yi, 2006). In fact, in our sample, the average leverage ratio of private firms is 0.676,
which is greater than for public firms, at 0.466 (see Panel B of Table 1).
14 In our sample, companies that report a non-zero revaluation loss also report a non-zero revaluation surplus, indicating that no revaluing companies report
only revaluation decrements.

YOO ET AL . 103
EXHIBIT 4 Components of asset revaluations for 271 public firms which elect FVA
PP&E Class Number of revaluing firms Proportion

Land 270 99.6%
Building 33 12.2%
Structure 9 3.3%
Machinery 12 4.4%
Others 3 1.1%
Korean won (KRW) or more. Consequently, our sample contains many large private firms: The number of private firms
and public firms that have assets greater than 500 billion KRW is 170 and 213, respectively.15 All public and private
firms in our sample are subject to the same reporting and external audit requirements, and there is no difference in the
corporate tax rates between public and private firms.
Panel A of Table 1 reports that our sample consists of 1,517 public firms and 13,089 private firms. It also reveals
that the proportion of public firms revaluing PP&E (17.86% = 271/1,517) is greater than that of private firms revaluing
PP&E (14.57% = 1,907/13,089). It is consistent with H1 that private firms are less likely than public firms to revalue
PP&E. Note, however, that the number and proportion of private firms that revalued PP&E (1,907 and 14.57%) are still
substantial.
Panel B of Table 1 reports the descriptive statistics. All variables are adjusted for the effect of asset revaluation.
We winsorize all variables, except for dummies at the 1st or 99th percentile values, to mitigate the effects of outliers.
Private firms have relatively more debt than public firms, as evidenced by the mean leverage ratio (0.676 vs. 0.466).
The average ROA was negative for public firms but marginally positive for private firms, suggesting that the 2008
global economic downturn affected public firms more adversely. The proportions of private firms that report nega-
tive operating cash flows (NegCFOD) and losses (LossD) are 34.7% and 29%, respectively. These figures are higher for
public firms (39.4% and 40.8%, respectively). The mean proportion of PP&E to total assets (PP&ERatio) is higher for
private firms than for public firms (0.328 vs. 9.255). Public firms are on average larger than private firms (mean Size
of 18.466 vs. 16.920). We also find that public firms are more likely to have revaluation experience in the past (28.3%
vs. 7.7%). Public firms have more quick assets relative to their current liabilities at the end of the preceding year than
private firms (mean QuickR of 2.388 vs. 1.820). In addition, public firms have higher proportions of exports to total
sales (ExportR) and are incorporated for a longer period (FirmAge) than private firms. The growth rate in sales (SalesG) is
inconclusive: the mean sales growth rate is higher for private firms, but the median sales growth rate is higher for public
firms.
Panels C and D of Table 1 show the Pearson and Spearman correlation coefficients among the variables that are used
in the subsequent probit regression of the choice of asset revaluation. Leverage and EqDepletD are highly positively cor-
related with each other: the Pearson correlation between Leverage and EqDepletD is 0.481 for public firms and 0.624
for private firms. ROA is negatively correlated with the incidence of losses (LossD), negative cash flows (NegCFOD), and
equity depletion (EqDepletD). Whereas larger firms exhibit better financial health than smaller firms on average, the
effect of firm size on financial performance seems weaker for private firms than for public firms. The Pearson correla-
tions of Size with EqDepletD, NegCFOD, and LossD are all significantly negative for both public and private firms, but the
magnitudes are smaller for the private firms.
15 Private companies represent a significant portion of the Korean economy. In our sample of Korean industrial companies that are subject to a mandatory
external audit, the sum of total assets and the sum of sales for private companies are 769 and 764 trillion KRW, whereas the corresponding amounts for the
public companies are 1,014 and 903 trillion KRW, respectively.
104 YOO ET AL .
TA B L E 1 Descriptive statistics
Panel A: Classification by Listing Status and Revaluation

Revaluers Non-revaluers Total
Public firms 271 1,246 1,517
(17.86%) (82.14%) (10.39%)
Private firms 1,907 11,182 13,089
(14.57%) (85.43%) (89.61%)
Total 2,178 12,428 14,606
(14.91%) (85.09%) (100.00%)
Panel B: Descriptive Statistics: Public versus Private Firms
Public firms (N = 1,517) Private firms (N = 13,089)
Variable Mean First quartile Median Third quartile Mean First quartile Median Third quartile
Leveraget 0.466 0.266 0.444 0.634 0.676 0.448 0.686 0.865
ROAt −0.080 −0.090 0.012 0.058 0.010 −0.015 0.021 0.064
NegCFODt 0.394 0.000 0.000 1.000 0.347 0.000 0.000 1.000
LossDt 0.408 0.000 0.000 1.000 0.290 0.000 0.000 1.000
EqDepletDt 0.038 0.000 0.000 0.000 0.146 0.000 0.000 0.000
PP&ERatiot 0.255 0.112 0.236 0.368 0.328 0.066 0.276 0.514
Sizet 18.466 17.565 18.231 19.165 16.920 16.211 16.687 17.407
PastRevDt 0.283 0.000 0.000 1.000 0.077 0.000 0.000 0.000t
QuickRt-1 2.388 0.787 1.304 2.506 1.820 0.419 0.815 1.505
ExportRt-1 0.008 0.000 0.000 0.000 0.001 0.000 0.000 0.000
SalesGt-1 0.111 −0.038 0.076 0.196 0.141 0.000 0.000 0.150
FirmAget-1 8.871 8.319 8.959 9.439 8.254 7.801 8.343 8.854
Panel C: Correlations among Key Variables: Public Firms (N = 1,517)
Leverage ROA NegCFOD LossD EqDepletD PP&ERatio Size PastRevD
Leverage −0.419** 0.200** 0.300** 0.481** 0.157** 0.068** −0.009
ROA −0.386** −0.355** −0.604** −0.521** 0.127** 0.400** 0.169**
NegCFOD 0.199 **
−0.424 **
0.354 **
0.149 **
−0.181 **
−0.147 **
−0.049
LossD 0.273 **
−0.851 **
0.354 **
0.240 **
−0.076 **
−0.311 **
−0.162**
EqDepletD 0.284** −0.300** 0.149** 0.240** −0.009 −0.185** −0.080**
PP&ERatio 0.158** 0.100** −0.181** −0.076** −0.016 0.197** 0.196**
Size 0.147 **
0.335 **
−0.147 **
−0.311 **
−0.183 **
0.197 **
0.327**
PastRevD 0.018 0.126** −0.049 −0.162** −0.080** 0.196** 0.335**
Panel D: Correlations among Key Variables: Private Firms (N = 13,089)
Leverage ROA NegCFOD LossD EqDepletD PP&ERatio Size PastRevD
Leverage −0.445** 0.177** 0.359** 0.624** 0.143** −0.023** −0.132**
ROA −0.470** −0.267** −0.602** −0.404** −0.074** 0.110** 0.015
NegCFOD 0.181** −0.337** 0.311** 0.163** −0.088** −0.025** −0.009
LossD 0.354** −0.786** 0.311** 0.430** 0.085** −0.045** −0.022*
EqDepletD 0.575 **
−0.388 **
0.163 **
0.430 **
0.078 **
−0.038 **
−0.095**
PP&ERatio 0.109** −0.132** −0.104** 0.040** 0.004 −0.035** 0.075**
Size 0.005 0.075** −0.031** −0.068** −0.051** −0.054** 0.158**
PastRevD −0.142** 0.000 −0.009 −0.022* −0.095** 0.101** 0.159**
(Continues)
YOO ET AL . 105
TA B L E 1 (Continued)
**, * Significant at the 1%, 5% level or better in a two-tailed test. Above (below) the diagonal are the Pearson (Spearman)
correlations.
Public firms are those that are listed on the Korea Exchange (KRX). Private firms are those that are not listed on KRX but
subject to a mandatory external audit. Revaluing firms are those that revalued property, plant, and equipment (PP&E) for the
accounting period ending December 31, 2008. Variables of revaluing firms are adjusted for the effect of PP&E revaluation. See
Appendix for the details of the revaluation adjustments and the definition of variables.
5 EMPIRICAL RESULTS
5.1 Univariate tests between revaluers and non-revaluers

Table 2 presents the univariate test results for the differences in firm characteristics between the firms that reval-
ued PP&E (“revaluers”) and those that did not (“non-revaluers”). For the public firms (Panel A), revaluers differ from
TA B L E 2 Univariate tests of revaluers and non-revaluers by listing status
Panel A: Public Firms (N = 1,517)

Non-revaluers (B)
Revaluers (A) (N = 271) (N = 1,246) Test of difference in (A – B)
Mean Median Mean Median Mean Median
Leverage 0.701 0.713 0.415 0.390 0.286** 0.323**
ROA −0.110 −0.028 −0.074 0.018 −0.036* −0.046**
**
NegCFOD 0.524 1.000 0.366 0.000 0.158 1.000**
LossD 0.572 1.000 0.372 0.000 0.200** 1.000**
**
EqDepletD 0.077 0.000 0.030 0.000 0.048 0.000**
PP&ERatio 0.304 0.275 0.244 0.224 0.060** 0.051**
**
Size 18.780 18.505 18.398 18.187 0.382 0.318**
PastRevD 0.373 0.000 0.264 0.000 0.109** 0.000**
Panel B: Private Firms (N = 13,089)
Non-revaluers (B)
Revaluers (A) (N = 1,907) (N = 11,182) Test of difference in (A – B)
Leverage 0.861 0.833 0.645 0.641 0.216** 0.193**
ROA −0.012 0.012 0.014 0.024 −0.026** −0.012**
**
NegCFOD 0.396 0.000 0.338 0.000 0.058 0.000**
LossD 0.313 0.000 0.286 0.000 0.026* 0.000*
EqDepletD 0.148 0.000 0.146 0.000 0.002 0.000
PP&ERatio 0.402 0.370 0.316 0.253 0.086** 0.117**
Size 16.941 16.701 16.917 16.686 0.024 0.015
PastRevD 0.093 0.000 0.074 0.000 0.019** 0.000**
**, * Significant at the 1%, 5% level or better in a two-tailed test.

Public firms are those that are listed on the Korea Exchange (KRX). Private firms are those that are not listed on KRX but
accounting period ending December 31, 2008. Variables of revaluing firms are adjusted for the effect of PP&E revaluation. See
106 YOO ET AL .
non-revaluers in all eight of this study’s variables. Whereas the mean and median Leverage, NegCFOD, LossD, EqDepletD,
PP&ERatio, Size, and PastRevD are higher for revaluers, the mean and median ROAs are lower for revaluers than for
non-revaluers.
As for private firms (Panel B), the differences between revaluers and non-revaluers are less pronounced. For
instance, in the private firm sample, the difference in the mean (median) Leverage is 0.216 (0.193), which is smaller
than 0.286 (0.323) for the public firms, and there is no significant difference in firm size between revaluers and non-
revaluers. We also find that in the case of private firms, revaluers are financially more distressed than non-revaluers. As
in the case of public firms, revaluing private firms report losses and negative operating cash flows more frequently than
non-revaluing private firms. However, the frequency of equity depletion is not significantly different between revaluing
private firms and non-revaluing private firms.
To summarize, regardless of whether firms are publicly traded or privately held, revaluing firms generally have
more eligible assets for revaluation, and they utilize more debt financing than non-revaluing firms. In addition,
there is a positive association between financial health and the choice of asset revaluation, regardless of listing
status.
5.2 Univariate tests between public and private firms

Table 3 presents the differences in firm characteristics between public and private firms by revaluation. For revaluers
(Panel A), there is a significant difference in firm characteristics between public and private revaluers. That is, revaluing
public firms report negative operating cash flows and losses more frequently, are larger on average, and are more likely
than private firms to have revalued PP&E in the past. In contrast, revaluing private firms utilize more debt, have lower
profitability, experience equity depletion more frequently, and have more PP&E than public firms. Panel B reports the
differences for non-revaluers. The results for non-revaluers are similar to those for the revaluers, except there is no
significant difference in the incidence of reporting negative cash flows.
In summary, public firms differ from private firms in many firm characteristics, including the composition of assets,
mode of financing, firm size, profitability, and past revaluation experience. In the following subsection, our comparative
analysis of asset revaluation between private and public firms will provide insight into the issue of whether and how
the form of ownership influences a firm’s decision to revalue PP&E.
5.3 Determinants of listing status

Table 4 reports the probit regression results of the choice of being private rather than public. The coefficients on Size,
Leverage, and FirmAge are of the predicted signs and are significant at the 1% level. However, the coefficient on QuickR
is significantly positive, in contrast to our prediction, suggesting that firms with a large amount of quick assets are
more likely to be private than public (once we control for other relevant variables). ExportR and SalesG are statistically
insignificant. The overall power of the model to distinguish private firms from public firms is good: the pseudo-R2 is
0.345.
In our subsequent tests of the differences in asset revaluations between private and public firms, we explicitly con-
sider the endogenous nature of firms’ choice of their listing status. That is, we estimate the probit regression of the
firms’ choice of listing status along with the probit regression of the choice of PP&E revaluation (referred to as the
“bivariate probit” model). In addition, as a robustness check, we take a two-step approach in controlling for the endo-
geneity of listing status by including the inverse Mills ratio (Freedman & Sekhon, 2010).
5.4 Comparison of revaluation behaviors of private versus public firms

Table 5 reports the estimation results of the probit regression of the choice of PP&E revaluation. We estimate two pro-
bit regression models: one with the private dummy, PrivateD, only and the other with PrivateD and all control variables
interacted with PrivateD. In the former specification (referred to as model 1), we implicitly assume that the influence
YOO ET AL . 107
TA B L E 3 Difference of public versus private firms by revaluation
Panel A: Revaluers (N = 2,178)

Private firms (B)
Public firms (A) (N = 271) (N = 1,907) Test of difference in (A – B)
Leverage 0.701 0.713 0.861 0.833 −0.160** −0.120**
ROA −0.110 −0.028 −0.012 0.012 −0.098** −0.040**
NegCFOD 0.524 1.000 0.396 0.000 0.128** 1.000**
LossD 0.572 1.000 0.313 0.000 0.259** 1.000**
EqDepletD 0.077 0.000 0.148 0.000 −0.071** 0.000**
PP&ERatio 0.304 0.275 0.402 0.370 −0.097 **
−0.096**
Size 18.780 18.505 16.941 16.701 1.839** 1.804**
PastRevD 0.373 0.000 0.093 0.000 0.279** 0.000**
Panel B: Non-revaluers (N = 12,428)
Public firms (A) (N = Private firms (B)
1,246) (N = 11,182) Test of difference in (A – B)
Leverage 0.415 0.390 0.645 0.641 −0.230** −0.250**
ROA −0.074 0.018 0.014 0.024 −0.088** −0.006**
NegCFOD 0.366 0.000 0.338 0.000 0.028 0.000
**
LossD 0.372 0.000 0.286 0.000 0.086 0.000**
EqDepletD 0.030 0.000 0.146 0.000 −0.116 **
0.000**
PP&ERatio 0.244 0.224 0.316 0.253 −0.072** −0.030**
Size 18.398 18.187 16.917 16.686 1.481** 1.501**
PastRevD 0.264 0.000 0.074 0.000 0.190** 0.000**
**, * Significant at the 1%, 5% level or better in a two-tailed test.

Public firms are those that are listed on the Korea Exchange (KRX). Private firms are those that are not listed on KRX, but are
accounting period ended December 31, 2008. Variables of revaluing firms are adjusted for the effect of PP&E revaluation. See
TA B L E 4 Determinants of listing status
Parameter Pred. sign Estimate z-value

Intercept (?) 12.488*** (40.05)
Size (–) −0.576 ***
(−38.38)
Leverage (+) 1.959*** (24.78)
***
QuickR (–) 0.020 (4.30)
ExportR (–) −0.356 (−0.92)
SalesG (–) 0.053 (1.56)
FirmAge (–) −0.262*** (−10.92)
Pseudo R2 0.345
No. of obs. 14,606
***, **, * Significant at the 1%, 5%, 10% level or better in a two-tailed test.
The dependent variable is an indicator that equals one for private firms, zero for public firms. Public firms are those that are
listed on the Korea Exchange (KRX). Private firms are those that are not listed on KRX but subject to a mandatory external
audit. Independent variables are measured as of the preceding fiscal year (i.e., year t – 1). See Appendix for the definition of
variables.
TA B L E 5 Determinants of the propensity to revalue PP&E: Public versus private firms
108
Model (1) Model (2)

Bivariate probit Single-equation probit Bivariate probit Single-equation probit
Parameter Pred. sign Estimate z-value Estimate z-value Estimate z-value Estimate z-value
Intercept (?) −3.070*** (−7.04) −2.092*** (−7.95) −3.491*** (−3.08) −2.788*** (−3.69)
PrivateD (PD) (–) −0.089 (−0.62) −0.474*** (−8.96) 0.825 (0.81) 0.290 (0.36)
Leverage (+) 1.900*** (27.54) 1.969*** (31.85) 2.579*** (10.89) 2.655*** (12.41)
ROA (–) −3.119*** (−8.99) −3.166*** (−9.09) −7.611*** (−3.87) −7.546*** (−3.84)
NegCFOD (+) 0.104*** (3.49) 0.107*** (3.57) 0.222** (2.38) 0.225** (2.41)
*** ***
LossD (+) −0.145 (−3.82) −0.144 (−3.76) 0.157 (1.26) 0.162 (1.30)
ROA × LossD (+) 3.962*** (10.71) 4.064*** (11.02) 9.230*** (4.68) 9.215*** (4.67)
EqDepletD (+) −0.994*** (−18.35) −1.013*** (−18.81) −0.165 (−0.58) −0.184 (−0.65)
PP&ERatio (+) 0.377*** (7.43) 0.372*** (7.30) 0.331 (1.36) 0.320 (1.31)
**
Size (?) 0.050 (2.51) 0.011 (0.78) 0.059 (1.01) 0.025 (0.60)
PastRevD (+) 0.301*** (6.34) 0.267*** (5.74) 0.285*** (2.85) 0.271*** (2.75)
Leverage × PD (–) −0.680*** (−2.89) −0.734*** (−3.28)
ROA × PD (+) 4.656** (2.33) 4.581** (2.29)
NegCFOD × PD (–) −0.128 (−1.30) −0.130 (−1.32)
LossD × PD (–) −0.330** (−2.51) −0.335** (−2.54)
ROA × LossD × PD (–) −5.143** (−2.56) −5.086** (−2.53)
EqDepletD × PD (–) −0.802*** (−2.78) −0.785*** (−2.72)
PP&ERatio × PD (?) 0.039 (0.16) 0.050 (0.20)
Size × PD (?) −0.038 (−0.74) −0.015 (−0.35)
PastRevD × PD (?) 0.018 (0.16) 0.023 (0.20)
Test of indep. of the two 7.154*** (0.008) N/A 0.640 (0.424) N/A
equations: 𝜒 2 (p-value)
No. of obs. 14,606 14,606 14,606 14,606
The dependent variable is the revaluation indicator that equals one if the firm revalued property, plant, and equipment (PP&E). Public firms are those that are listed on the Korea Exchange
(KRX). Private firms are those that are not listed on KRX but subject to a mandatory external audit. Revaluing firms are those that revalued PP&E for the accounting period ending December
YOO ET AL .
31, 2008. Variables of revaluing firms are adjusted for the effect of PP&E revaluation. See Appendix for the details of the revaluation adjustments and the definition of variables.
YOO ET AL . 109
of the factors affecting the choice of PP&E revaluation is uniform across private and public firms, whereas the latter
specification, with the full interaction terms (referred to as model 2), allows for potential differences in the impact of
these factors on the choice of PP&E revaluation between private and public firms.
Because the choice of listing status is not randomly determined, we control for the endogeneity of the choice of
listing status in the probit regression of the choice of PP&E revaluation. That is, we estimate the bivariate probit model
of the choice of PP&E revaluation and the choice of listing status by maximum likelihood. However, as a benchmark, we
also present the single-equation probit model, which ignores endogeneity.
First, we examine whether private firms differ from public firms in their propensity to revalue PP&E. In Panel A of
Table 1, we observed that private firms revalued less frequently than public firms (14.57% for private firms vs. 17.86%
for public firms), but we have not taken into consideration that private firms differ from public firms in many respects,
including the mode of financing and contractual environment (Panel B of Table 1). In our regression test, we formally
control for those factors influencing the propensity to revalue PP&E and the endogeneity of listing status.
In model (1), the bivariate probit regression yields an insignificant coefficient on PrivateD (−0.089, z-value = −0.62),
suggesting there is no significant difference in the propensity to revalue PP&E between private and public firms. This
result is in stark contrast to that of the single-equation probit model, which ignores endogeneity and gives rise to a
significantly negative coefficient on PrivateD (−0.474, z-value = −8.96). Because the test of endogeneity (𝜒 2 = 7.154,
p = 0.008) indicates that it is necessary to explicitly control for the endogeneity of the listing status, we need to base
our inference on the bivariate probit model rather than the single-equation probit model. On the other hand, when we
allow for the full interactions with PrivateD in model (2), the test of the endogeneity of the listing status is insignificant
(𝜒 2 = 0.640, p = 0.424), suggesting that the single-equation probit estimation would be as efficient as the bivariate
probit estimation. However, regardless of the estimation method, the insignificant coefficient on PrivateD indicates that
private firms do not differ from public firms in their propensity to revalue PP&E once we control for factors influencing
the choice of listing status or allow for the full interactions.
5.5 Comparison of revaluation behaviors of high-leveraged versus low-leveraged firms

To test H2, we partition the sample into high-leverage firms (those with debt-to-equity ratios of 200% or above) and
low-leverage firms (those with debt-to-equity ratios below 200%) and re-estimate Equation (2) in each subsample.
Table 6 presents the bivariate probit estimation results. We find a significant difference for the low-leverage firms in
the propensity to revalue PP&E between private and public firms but not for the high-leverage firms. The coefficient on
PrivateD is significantly negative at the 1% level for the low-leverage firms (−5.094, z-value = −4.00) but insignificant
for the high-leverage firms (−1.929, z-value = −1.22). The subsample analysis suggests that the result of no difference
for the full sample (in Table 5) is attributable to those highly leveraged firms, for which both public and private firms
have an incentive to revalue PP&E regardless of their listing status. Taken together, the results in Table 6 are consis-
tent with the prediction of H2 that the effect of listing status on asset revaluation is more pronounced for low-leverage
firms than for high-leverage firms.
Further, we find that the factors influencing the choice of PP&E revaluation differ between public and private firms
and that the effect of the listing status varies between high- and low-leverage firms. For example, the incidence of
reporting losses and the level of leverage are significant determinants for the low-leverage firms but not for the high-
leverage firms (regardless of their listing status). The coefficients on LossD and Leverage are significantly positive only
for the low-leverage firms (2.889 and 0.273), and their interaction terms with PD are insignificant. For firm size, a sig-
nificantly negative coefficient on Size and a significantly positive coefficient on Size × PD for the low-leverage firms
(−0.222 and 0.204) imply that small public firms are more likely to revalue PP&E when their leverage is low, but small
private firms do not differ from large private firms in their propensity to revalue PP&E.
In summary, we find that among those firms with low leverage, public firms opt for the FVA option more often than
private firms, suggesting that the need to communicate fair value information with diversified equity holders is more
important than the need to do so with creditors. However, among those firms with high leverage, we find no difference
in the FVA choice between private and public firms. This finding implies that during the global financial crisis, highly
110 YOO ET AL .
TA B L E 6 Determinants of the propensity to revalue PP&E conditional on leverage level
High-leverage firms Low-leverage firms

Parameter Pred. sign Estimate z-value Estimate z-value
Intercept (?) 1.223 (0.76) 2.359* (1.84)
PrivateD (PD) (–) −1.929 (−1.22) −5.094*** (−4.00)
Leverage (+) 0.302 (0.69) 2.889*** (7.80)
ROA (–) −6.68 (−1.32) −5.827 ***
(−2.89)
NegCFOD (+) 0.535 (1.62) 0.346 (0.60)
LossD (+) 0.009 (0.06) 0.273** (2.40)
ROA × LossD (+) 0.396* (1.72) −0.243 (−1.57)
EqDepletD (+) 8.357* (1.65) 6.626*** (3.25)
PP&ERatio (+) 1.541*** (4.01) −0.65* (−1.93)
Size (?) −0.065 (−0.84) −0.222*** (−3.37)
PastRevD (+) 0.245 (1.40) 0.25** (2.07)
Leverage × PD (–) 0.627 (1.40) 0.009 (0.02)
ROA × PD (+) 3.786 (0.75) 4.827** (2.32)
NegCFOD × PD (–) −1.215*** (−3.63) −0.527 (−0.72)
LossD × PD (–) 0.057 (0.37) −0.174 (−1.32)
ROA × LossD × PD (–) −0.603*** (−2.57) 0.092 (0.49)
EqDepletD × PD (–) −4.945 (−0.97) −5.09** (−2.29)
PP&ERatio × PD (?) −1.117*** (−2.87) 0.574 (1.59)
Size × PD (?) 0.02 (0.25) 0.204*** (3.07)
PastRevD × PD (?) 0.359* (1.89) −0.254* (−1.65)
Test of difference of PD (p-value) −3.165* (0.073)
No. of obs. 7,172 7,434
The sample is partitioned into high-leverage firms (those with debt-to-equity ratios of 200% or above) and low-leverage firms
(those with debt-to-equity ratios below 200%) at the end of 2008 on a before-revaluation basis.
leveraged private firms had a strong incentive to utilize FVA as a useful means to comply with the government guideline
for the debt-to-equity ratio and to ease the potential hold-up problem by influential creditors.
5.6 Sensitivity analysis

First, we note that smaller firms are more likely to take the form of private ownership than public ownership. To better
control for the size difference between public and private firms, we restrict our analysis to firms whose size is greater
than the median value of the sample firms’ size. The resulting restricted sample of 7,303 large firms consists of 1,428
public firms and 5,875 private firms. The sample contains 1,344 revaluers (267 public firms and 1,077 private firms).
Column (1) of Table 7 reports the estimation results for the restricted sample of large firms. The proportion of public
firms to private firms in the restricted sample is more balanced than that in the original full sample (1:4 in the restricted
sample vs. 1:8.6 in the full sample), and the proportion of revaluers is similar between the public and private samples
(18.70% vs. 18.33%). The results for the restricted sample are qualitatively similar to those for the full sample in Table
5, indicating that controlling for the size differences between private and public firms by a different method does not
lead to differences in our inferences on the propensity to revalue PP&E.
Next, we take a two-step approach in controlling for the endogeneity of listing status. Although it is less efficient
than the bivariate probit model in Table 5, the two-step approach is often used in practice (Freedman & Sekhon, 2010).
YOO ET AL . 111
TA B L E 7 Sensitivity tests
(1) Large firms (2) Two-step approach

Parameter Pred. sign Estimate z-value Estimate z-value
Intercept (?) 1.158 (1.07) −3.326*** (−3.06)
PrivateD (PD) (–) 0.574 (0.52) 0.705 (0.70)
Leverage (+) 3.353*** (14.93) 2.604*** (11.50)
ROA (–) −5.896*** (−3.16) −7.61*** (−3.86)
NegCFOD (+) 0.240*** (2.71) 0.223** (2.39)
LossD (+) 0.109 (0.93) 0.159 (1.27)
ROA × LossD (+) 7.554*** (4.02) 9.245*** (4.68)
EqDepletD (+) −0.394 (−1.44) −0.170 (−0.60)
PP&ERatio (+) 0.196 (0.83) 0.329 (1.34)
Size (?) −0.174*** (−3.31) 0.050 (0.91)
PastRevD (+) 0.199** (2.06) 0.282*** (2.82)
Leverage × PD (–) −0.877 ***
(−3.52) −0.698 ***
(−3.04)
ROA × PD (+) 3.706* (1.92) 4.651** (2.32)
NegCFOD × PD (–) −0.119 (−1.20) −0.129 (−1.31)
LossD × PD (–) −0.323** (−2.44) −0.331** (−2.52)
ROA × LossD × PD (–) −4.557 **
(−2.32) −5.144 **
(−2.55)
EqDepletD × PD (–) −0.842*** (−2.94) −0.798*** (−2.76)
PP&ERatio × PD (?) 0.358 (1.45) 0.042 (0.17)
Size × PD (?) −0.080 (−1.47) −0.033 (−0.65)
PastRevD × PD (?) 0.155 (1.37) 0.018 (0.16)
Inverse Mills Ratio −0.069 (−0.69)
Test of indep. of the two eq.: 𝜒 2 (p-value) 15.983*** (<0.001) N/A
No. of obs. 7,303 14,606
Large firms are those whose firm size is greater than the median value of firm size. In the two-step approach, we first estimate
the Probit regression of the listing status choice. The inverse Mills ratio (IMR) calculated from the first-step Probit regression
is included in the second-step Probit regression of the revaluation decision.
In the first step, we estimate the probit model of listing status and calculate the inverse Mills ratio, i.e., PrivateD 𝜙/Φ −
(1 − PrivateD)𝜙/(1− Φ). In the second-step probit regression of the choice of PP&E revaluation, we include the inverse
Mills ratio (IMR) as an additional explanatory variable. Column (2) of Table 7 reports the result of the two-step approach.
The results using the inverse Mills ratio as a control for endogeneity are similar to those of the bivariate probit regres-
sion in Table 5.
Finally, we estimate Equations (1) and (2) running the OLS regressions instead of the probit regressions and find that
the (untabulated) results are consistent with those in Tables 5 and 6.
6 SUMMARY AND DISCUSSION
When the fair value accounting option for fixed assets was introduced in 2008, an unusually higher proportion of
Korean firms elected this option. We trace the economic forces and institutional environment attributable to the asset
revaluation boom. During the global financial crisis in Korea, we find that private firms were as likely to revalue PP&E
as public firms when they relied heavily on debt financing, which does not support the prevailing argument in the
112 YOO ET AL .
contracting literature that public firms are more likely to elect the FVA option than private firms. We interpret our
results to mean that during the period of financial turmoil with rampant fear of a credit crunch and huge uncer-
tainties, highly leveraged private firms were under similar pressure as public firms to maintain their debt-to-equity
ratios below the government-set guideline and to allay a potential hold-up problem by lenders. This perspective
for the demand for fair value accounting is new and distinct from the need to convey fair value information to
diversified stakeholders in the extant contracting literature. Future research may investigate whether corporate
responses to the demand for fair value information vary across different institutional settings due to the differ-
ences in the mode of financing and the way that firms resolve information asymmetry between the firm and outside
stakeholders.
ACKNOWLEDGEMENTS
The authors appreciate comments and suggestions from Young Soon Cheon, Bong Heui Han, Jongchan Park, Sunghwa
Park, Bong Hwan Kim and seminar participants at the 2010 Korean Accounting Association Conference in Busan, the
2012 Japan Accounting Association Conference in Tokyo, and the 2013 Korean Securities Association Conference
in Seoul. Jinhan Pae acknowledges financial support from a Korea University Business School grant and Choong-Yuel
Yoo acknowledges financial support received from a 2014 KAIST internal research grant. (Paper received July 2015,
revised revision accepted July 2017)
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How to cite this article: YOO C-Y, Choi TH, Pae J. Demand for fair value accounting: The case of
the asset revaluation boom in Korea during the global financial crisis. J Bus Fin Acc. 2018;45:92–114.
https://doi.org/10.1111/jbfa.12266
114 YOO ET AL .
APPENDIX
Definition of variables
EqDepletD Indicator variable that equals one when the rate of equity depletion is greater than or equal
to 0.5. The rate of equity depletion is calculated by one minus total shareholders’ equity
divided by the amount of legal capital
ExportR Ratio of the amount of exports to total sales
FirmAge Log of firm age (measured in days since the incorporation)
Leverage Total liabilities divided by total assets
LossD Indicator variable that equals one when net income is negative
NegCFOD Indicator variable that equals one when operating cash flows are negative
PastRevD Indicator variable that equals one when the firm revalued assets in the past
PrivateD (PD) Indicator variable for private firms
PP&ERatio Ratio of PP&E to total assets
QuickR Quick ratio measured by current assets minus inventory divided by current liabilities
RevalD Indicator variable for the firms that revalued property, plant, and equipment (PP&E)
ROA Return on assets defined by net income divided by total assets
SalesG Sales growth rate
Size Natural logarithm of total assets
For firms that revalued PP&E, we adjust all variables for the effect of a revaluation, using a deferred tax (DT) rate of
22%, which is the anticipated corporate tax rate for future periods.
Effect on assets (or PP&E) = Revaluation Increment∕(1 − DT rate) − Revaluation Decrement
Effect on liabilities = (Revaluation Increment∕(1 − DT rate) − Revaluation Decrement) × DT rate
Effect on equity = Revaluation Increment − Revaluation Decrement × (1 − DT rate)
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Article in Journal of Business Finance & Accounting · July 2017

Choong-Yuel Yoo Jinhan Pae

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Demand for fair value accounting: The case of the

1 Korea Advanced Institute of Science and

Technology (KAIST) College of Business Abstract

2 BACKGROUND AND HYPOTHESIS DEVELOPMENT

2.1 Accounting rules for asset revaluation

and across fair value topics.

2.2 Asset revaluation in Korea

EXHIBIT 1 Excerpts from press releases of a bond rating firm

Panel A: Response to a publicly-traded firm’s asset revaluation.

Revaluation Change in Debt-to-equity

Growth rate (Unit: %) 2004 2005 2006 2007 2008

Source: Bank of Korea, Financial Statement Analysis for 2008

2.3 Prior research on asset revaluation

2.4 Listing status and financial reporting practice

2.5 Empirical hypotheses

3.1 Effect of asset revaluation

Increase in liabilities = [(after-tax) revaluation increment∕(1 − deferred tax rate)]

Increase in equity = (after-tax) revaluation increment − [(before-tax) revaluation decrement

3.2 Model for the choice of asset revaluation

RevDi = 𝛽0 + 𝛽1 Leveragei + 𝛽2 ROAi + 𝛽3 NegCFODi + 𝛽4 LossDi + 𝛽5 (ROAi × LossDi )

+ 𝛽6 EqDepletDi + 𝛽7 PP & ERatioi + 𝛽8 Sizei + 𝛽9 PastRevDi + 𝜀i , (1)

RevDit = 𝛽0 + 𝛽1 PrivateDit + 𝛽2 Leverageit + 𝛽3 ROAit + 𝛽4 NegCFODit + 𝛽5 LossDit

+ 𝛽6 (ROAit × LossDit ) + 𝛽7 EqDepletDit + 𝛽8 PP&ERatioit + 𝛽9 Sizeit + 𝛽10 PastRevDit

+ 𝛽11 (Leverageit × PDit ) + 𝛽12 (ROAit × PDit ) + 𝛽13 (NegCFODit × PDit )

3.3 Controlling for listing status

PrivateDit = 𝛽0 + 𝛽1 Sizeit−1 + 𝛽2 Leverageit−1 + 𝛽3 QuickRit−1

+ 𝛽4 ExportRit−1 + 𝛽5 SalesGit−1 + 𝛽6 FirmAgeit−1 + 𝜀it . (3)

4 SAMPLE SELECTION AND DATA

only revaluation decrements.

PP&E Class Number of revaluing firms Proportion

Panel A: Classification by Listing Status and Revaluation

5.1 Univariate tests between revaluers and non-revaluers

TA B L E 2 Univariate tests of revaluers and non-revaluers by listing status

Panel A: Public Firms (N = 1,517)

**, * Significant at the 1%, 5% level or better in a two-tailed test.

5.2 Univariate tests between public and private firms

5.3 Determinants of listing status

5.4 Comparison of revaluation behaviors of private versus public firms

TA B L E 3 Difference of public versus private firms by revaluation

Panel A: Revaluers (N = 2,178)

**, * Significant at the 1%, 5% level or better in a two-tailed test.

TA B L E 4 Determinants of listing status

Parameter Pred. sign Estimate z-value

Model (1) Model (2)

5.5 Comparison of revaluation behaviors of high-leveraged versus low-leveraged firms

TA B L E 6 Determinants of the propensity to revalue PP&E conditional on leverage level

High-leverage firms Low-leverage firms

5.6 Sensitivity analysis

(1) Large firms (2) Two-step approach

6 SUMMARY AND DISCUSSION

Effect on assets (or PP&E) = Revaluation Increment∕(1 − DT rate) − Revaluation Decrement

Effect on liabilities = (Revaluation Increment∕(1 − DT rate) − Revaluation Decrement) × DT rate

Effect on equity = Revaluation Increment − Revaluation Decrement × (1 − DT rate)

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