The Impact of Appraisal Quality on the Voluntary Disclosure of Asset Revaluation

• Published date: 01 October 2019
• DOI: http://doi.org/10.1111/ajfs.12275
• Date: 01 October 2019
• Author: Jinhan Pae,Younghyo Song

The Impact of Appraisal Quality on the

Voluntary Disclosure of Asset Revaluation*

Younghyo Song

Business School, Korea University, Republic of Korea

Jinhan Pae**

Business School, Korea University, Republic of Korea

Received 21 March 2018; Accepted 13 June 2019

Abstract

In the wake of the global financial crisis, we compare Korean firms that voluntarily disclosed

their revaluation in a timely manner with those that did not. We find that firms are more

likely to disclose revaluation when they hire a large, reputable appraisal firm and when they

have a large number of revaluation increments. We observe a significantly positive market

reaction to the voluntary disclosure of the revaluation results. A positive market reaction is

mainly observed for firms that hired a large, reputable appraisal firm, had a large number of

revaluation increments, and were under greater financial distress before revaluation.

Keywords Revaluation; Voluntary disclosure; Global financial crisis; Quality of appraisals

JEL Classification: G01, G10, M41

1. Introduction

During the 2007–2008 global financial crisis, a large number of Korean firms suf-

fered financial distress. In an attempt to alleviate the financial burden of those

firms, the Financial Services Commission of Korea prompted the Korean Account-

ing Standards Board (KASB) to introduce a revaluation option for property, plant,

and equipment (PP&E). Upon the revision of the accounting standard for PP&E at

the end of 2008, approximately 18% of listed Korean firms revalued their PP&E

between January and March 2009 (Choi et al., 2013). Even though PP&E revalua-

tion was a significant event, a majority of the revaluing firms did not disclose their

revaluation in a timely manner. In this paper, we examine why some of the revalu-

ing firms made a timely disclosure and others did not disclose this information

*This paper is based on the PhD dissertation of Younghyo Song at Korea University Business

School. Pae acknowledges partial financial support from Korea University Business School

Research Grant.

**Correspondingauthor: Korea University Business School, Anam-ro,Seongbuk-gu, Seoul 02841,

Republic of Korea. Tel: +82-2-3290-2835, Fax: +82-2-922-7220, email: jinhanpae@korea.ac.kr.

Asia-Pacific Journal of Financial Studies (2019) 48, 615–639 doi:10.1111/ajfs.12275

©2019 Korean Securities Association 615

until they issued financial statements. Extant studies have mainly focused on the

motives and determinants of asset revaluation (Easton et al., 1993; Barlev et al.,

2007; Pae et al., 2010; Choi et al., 2013; Jang and Hong, 2018; Sellhorn and Stier,

2018; Yoo et al., 2018) but have not examined timely and voluntary communication

of the revaluation results to stakeholders. We fill this void in the asset revaluation

literature. Specifically, utilizing the period during which immediate disclosure of

revaluation was not mandatory, we examine the factors influencing voluntary dis-

closure of revaluation and the market reaction to the voluntary disclosures.

Financial statements provide reliable information to stakeholders but are ineffi-

cient in providing timely information, partially due to reporting regulations, stan-

dardization, and the inflexibility of accounting standards (Ball et al., 2012). Thus,

firms use voluntary disclosures as a useful means to communicate value-releva nt

information in a timely manner to stakeholders. In the PP&E revaluation setting of

this paper, we presume that firms voluntarily disclose the results of revaluation only

when the benefits of the disclosure exceed the related costs. The potential benefits

of the disclosure include a more favorable assessment by the capital marke t when

the fair values of PP&E significantly exceed the book values, and an abatement of

the risk of bankruptcy and delisting when improved financial ratios help firms to

circumvent a technical violation of debt covenants and maintain the capital reten-

tion requirements for continual listing. Firms experiencing financial distress may

choose to disclose their revaluation results to obtain additional capital with more

favorable terms. On the other hand, some firms may choose not to disclose if reval-

uation is interpreted as a signal for poor financial performance or how close the

firms may be to breaching the debt covenants (Gaeremynck and Veugelers, 1999).

The Korea Exchange (KRX), the regulatory body for listed firms in Korea, did

not mandate an immediate disclosure of asset revaluation until 16 April 2009. Thus,

between January and March 2009, revaluing firms had discretion over the disclo sure

of their PP&E revaluation, that is, firms either disclosed immediately their revalua-

tion or withheld such information until they issued financial statements. We utilize

this special setting to investigate the voluntary disclosure behaviors of revaluing

firms in Korea. Using a sample of 245 firms that revalued their PP&E, we examine

the factors that influence a firm’s voluntary disclosure of PP&E revaluation befor e

the issuance of financial statements and the capital market’s reaction to the volun-

tary disclosure of asset revaluation.

In this study, we presume that large appraisal firms provide better-quality

appraisal services than smaller appraisal firms. Our use of appraisal firm size as a

proxy for appraisal service quality is analogous to the findings and interpretations

of the auditing literature: larger auditing firms generally provide better-quality audit

services than smaller auditing firms (Simunic, 1980; DeAngelo, 1981; Palmrose,

1988; Becker et al., 1998; Ball et al., 2012). We compare the fair value estimate of

land in the revaluation report to the corresponding officially assessed land price

(OALP), which the Government uses to levy property taxes. In support of our use

of appraisal firm size as a proxy for the quality of appraisal services, we find that

Y. Song and J. Pae

616 ©2019 Korean Securities Association