Revaluation of Fixed Assets in Accruals Accounting

The paper explores the topic of revaluation in accruals accounting under the assumption that an important purpose of financial statements is to report 011 management's financial performance. Having differentiated valuation and matching based approaches, the paper proceeds to indicate some reasons for revaluation in the latter by reference to the literature of management accounting and logical argument. It identifies exit value (net realisable value) as the most appropriate basis for valuation for the postulated purpose, but argues that revaluation should not occur annually but by reference to the expiration of ‘planning periods’ or to other specified events which may occur earlier. Therefore its arguments and proposals differ from those previously associated with advocates of exit value. The article concludes by discussing some of the practical issues arising from its suggestions.     

Equity valuation in practice: The influence of net financial expenses

This study investigates the relevance of net financial expenses with respect to equity valuation in an IFRS accounting regime. According to the residual earnings valuation model, income related to balance sheet items that are recorded at fair value is not applicable for valuation purposes. There are no residual earnings associated with these items because the balance sheet provides ‘perfect’ value estimates for the items in question. In accordance with the contention that under IFRS, aggregate net financial liabilities are recorded at a book value that is close to fair value, this study demonstrates that net financial expenses are not associated with the market prices of stocks. The investigation discusses the empirical findings in light of the enduring controversies regarding the use of fair value accounting.     

Economic growth potential creating a real put and the resulting valuation of the firm

What do innovative new firms in our dynamic economy do to the value of existing firms? Using Schumpeter’s creative destruction idea, we expand the valuation model to incorporate these dynamics. Our model shows that these dynamics should have a greater effect on smaller firms, those in closer to perfect product market competition and those with less financial market following, as they get less market feedback for warning of new competition. This additional consideration in valuation is named the “real put” as it is an optionagainst value. Simply stated, it is an amount subtracted from a firm’s market value of capitalized earnings, plus any growth potential (that might create destructive competition against other producers) to get its net value. Following Schumpeter, new entrepreneurs and larger firms that mimic existing entrepreneurs are the innovators of new products and services. They create the real put against value in their potential competitors. We empirically test this using Morningstar’s “moat” classification of firms. We find firms with “wider moats” meaning greater product market power have much lower delisting rates that indicate smaller puts against value being exercised. While we are not the first in finance to view Schumpeter’s ideas, this is the first paper to consider its direct effect on valuation.     

Majority and Minority Ownership of Publicly-Traded Firms: A Test of the Value of Control Using Market Multiples

Publicly-traded companies that are controlled by other publicly-traded companies provide a unique setting in which to test whether the market values of majority and minority ownership interests are proportionate to their ownership percentages. Test results indicate that the value of subsidiary net assets and net income are greater to majority shareholders than to minority shareholders. However, comparison of asset and income valuation with a sample of diffusely-held firms indicates that this valuation asymmetry is not due to a wealth transfer from the minority to the majority owners but to a discounting of the portion of the subsidiary owned by the minority shareholders.     

Value Relevance of Comprehensive Income

In this paper, we investigate the value relevance of comprehensive income and its components for a sample of 92 New Zealand companies over the period 2003–2010. We find a stronger association of aggregate comprehensive income with stock price and market returns relative to net income. The change in the asset revaluation reserve and the change in fair value of available‐for‐sale securities drive this association. However, foreign currency translation and cash flow hedges are also associated with prices and returns.     

The Industry Effects Regarding the Probability of Takeovers

This study attempts to determine whether an acquisition announcement signals potential gains to the corresponding industry rivals of the target, and whether these gains can be explained by industry-specific and rival firm-specific factors that reflect the likelihood of a takeover. The research finds that the valuation effects of the target, combined acquirer and target, and industry rivals of the target are positive and significant. The mean valuation effects per corresponding industry are significantly related to industry-specific characteristics that reflect the probability of a takeover. Specifically, industries characterized as having a higher level of free cash flow, a higher level of tangible assets, and a smaller market value experience a more favorable revaluation. A supplemental analysis of the individual rival firms is also conducted, since the variation in the valuation effects between rival firms within each of the industries is distinctly different from the variation of mean industry effect across industries. The analysis of the individual rivals finds that the same rival-specific variables are significant and in the same direction as the analysis of the industry-specific variables. In addition, the valuation effects of individual rivals are also inversely related to their previous performance. Overall, the results suggest that industry-specific and rival firm-specific characteristics that reflect a higher probability of a takeover are important in explaining acquisition gains and motivation.     

The Net Benefits to Leverage

I estimate the market's valuation of the net benefits to leverage using panel data from 1994 to 2004, identified from market values and betas of a company's debt and equity. The median firm captures net benefits of up to 5.5% of firm value. Small and profitable firms have high optimal leverage ratios, as predicted by theory, but in contrast to existing empirical evidence. Companies are on average slightly underlevered relative to the optimal leverage ratio at refinancing. This result is mainly due to zero leverage firms. I also look at implications for financial policy.     

资源类上市公司的价值评估方法探讨

现有“利润加储量”的评估方法应用于资源类公司仍在某些环节出现悖论。本文认为，资源类上市公司的价值构成应包括矿权重估溢价、正常开采投资收益及个别公司的超额利润。其中，采矿权重估溢价的潜在收益应是在矿权未市场化之前的资源类企业获得的特有收益，但其收益期和相应的折现期也因矿权的逐步市场化而受到采矿权有效期的限制。本文用简单模型估算了主要资源类上市公司的基本价值。     

The impact of the institutional environment on the value relevance of fair values

Most prior studies attribute valuation discounts on certain fair valued assets to measurement error or bias. We argue that institutional differences across countries (e.g., information environment or market sophistication) affect investors’ ability to process and impound fair value information in their valuation. We predict that the impact of the institutional environment on value relevance is particularly pronounced for reported fair values of assets designated at fair value through profit or loss (hereafter, “FVO assets”), for which investor experience is lowest and complexity is highest. Using a global sample of IFRS banks, we find that FVO assets are generally less value relevant than held-for-trading assets (HFT) and available-for-sale assets (AFS). By partitioning countries into market- and bank-based economies to proxy for institutional differences, we find that the valuation discount on FVO assets is more pronounced in bank-based economies. Additional tests suggest that this valuation discount is attenuated by a richer firm-level information environment and the presence of institutional investors with fair value experience.     

Risk-adjusted discount rates and capital budgeting under uncertainty

This paper is concerned with the valuation of multiperiod cash flows in a world where prices are determined according to the Sharpe-Lintner-Black model of capital market equilibrium. We find that the current market value of any future net cash flow is the current expected value of the flow discounted at risk-adjusted discount rates for each of the periods until the flow is realized. The discount rates are known and non-stochastic, but the rates for the different periods preceding the realization of a cash flow need not to be the same, and the rates relevant for a given period can differ across cash flows. The risk adjustments in the discount rates arise because of uncertainties about reassessments through time of the expected value of a flow and the relationships between these reassessments and the corresponding reassessments of the expected cash flows of all firms.     

Size matters: The impact of financial liberalization on individual firms

We attempt to answer the following questions: What are the revaluation effects and the impact on performance, volatility, and return correlation from stock market liberalization in emerging markets? These questions have been studied extensively at the market level but not at the firm level. Our results show significantly different impact of stock market liberalization across firms. Large firms tend to exhibit large revaluation effects, insignificant change in performance, large declines in volatility, and insignificant change in correlation from liberalization. Small firms show small revaluation effects, improved performance, smaller decline in volatility and decreases in correlation after liberalization.     

Motives for fixed-asset revaluation: An empirical analysis with Swiss data

This paper investigates the economic motives of fixed-asset revaluations of Swiss listed companies. We provide international insights on revaluation motives, particularly in a stakeholders' regime, over a period which is characterized by significant changes of the accounting standards relative to fixed-assets valuation. We also test the impact of international stakeholders on the choice of whether to revalue assets. Results from pooled data show positive associations between revaluation and both the proportion of foreign sales and leverage, and a negative association with the investment opportunities. These findings suggest that revaluation is used as a device to improve creditors' and foreign stakeholders' perceptions of the financial health of the firm and thereby improve the firm's borrowing capacity. Cross-sectional results show that although leverage has declined over the periods investigated, interest rates have become lower for firms that revalue upward their fixed assets (compared to non-revaluers), emphasizing the debt-costs hypothesis.     

Modigliani and Miller Again Revisited: The Cost of Capital with Unequal Borrowing and Lending Rates

The financial literature asserts that financial managers must borrow at least to some degree if they are to optimise the value of their companies. This result has been described in the literature as ‘perhaps the single most important result in the theory of corporate finance obtained in the last 30 years’ (Copeland and Weston, 1988, p. 443). Based on US tax systems, the value added to a company by debt has been estimated as high as 35 to 50% of the debt's market value. More recently in this journal, Ashton (1989b) has argued that under the present UK tax system, the theoretical tax advantage afforded by debt should be estimated at no more than 13% of the debt's market value. The contribution of this paper is to draw attention to an aspect of borrowing that has largely escaped attention, but which nevertheless affects the above conclusions: namely, that the market spread between borrowing and lending constitutes a ‘cost’ for corporate borrowing. This paper demonstrates that in the context of the present UK tax system, this ‘cost’ of borrowing is sufficient to nullify entirely the formerly perceived financial tax benefits of corporate borrowing. We conclude that, at present, corporate borrowing could imply a net disadvantage for the valuation of a company's equity by about 6 or 7% of the debt's market value.     

CORPORATISATION AND ASSET VALUATION FOR A GOVERNMENT CORPORATION

This paper reports the asset valuation procedures used in the corporatisation of a New Zealand state owned enterprise. Determination of an equitable valuation is crucial to the subsequent (equitable) monitoring of management performance and also in anchoring the expected value of the business in the wake of privatisation. The process used to arrive at the asset valuation consisted of two distinct stages: methodology choice and implementation. The separation of the two steps was an important factor in reaching a speedy and well received valuation. The process is discussed in some detail. The result was a valuation derived from a theoretically sound base (i.e., net present value) yet consistent with more pragmatic commercial realities.     

THE VALUATION EFFECTS OF OUT-OF-THE-MONEY CALLS OF CONVERTIBLE SECURITIES

We examine the valuation effects of out-of-the-money calls of convertible securities. In general, out-of-the-money calls generate positive abnormal stock returns. These returns are higher when the call price exceeds the market value of the called securities (positive premium calls), compared with when the market value exceeds the call price (negative premium calls). Furthermore, Value Line Investment Survey net operating income forecasts are significantly higher after call announcements for positive premium calls, while the revision is insignificant for negative premium calls. The results are consistent with the hypothesis that positive premium calls signal positive information.     

A Test of the Signaling Value of IPO Underpricing with REIT IPO-SEO Pairs

The asymmetric information hypothesis states that IPO underpricing signals superior firm value. During the post-IPO period, the market learns the firms true worth such that good quality firms issue seasoned equity at favorable prices and recoup the loss sustained at IPO. Since REITs have no special incentive to issue debt because of their tax-exempt status, and since they must pay out 95 percent of net income as dividends, REIT managers are hard pressed to raise capital through seasoned equity. Consequently, the signaling link between IPOs and SEOs is critical for REITs. Consistent with the signaling model, we find strong evidence that (1) REITs that underprice IPOs more are likely to sell seasoned equity sooner, (2) higher IPO underpricing results in larger joint amount of capital raised through an IPO-SEO pair, and (3) firms that underprice IPOs underprice SEOs as well. IPO underpricing does not mitigate the valuation loss associated with seasoned offerings, however.     

Market segmentation and the valuation of closed-end country funds: An empirical analysis

This article examines the role of market segmentation on the valuation of the U.S. stock exchange-listed closed-end country funds and analyzes the determinants of net fund premia in a multivariate context. It is shown that fund returns are generally sensitive to both national and U.S. market factors, but only national factors are priced. Cross-section and time series estimation of net fund premia indicates the importance of market segmentation as a determinant of net fund premia. There is some evidence that exchange rate changes may exert an additional influence. However, market expectation variables such as economic growth of the country or relative capitalization rates are insignificant.     

Labor cost voluntary disclosures and firm equity values: Is human capital information value-relevant?

This study examines the market value relevance of labor cost voluntary disclosures using a valuation model relating firm market values to book values of equity and to disclosed human capital information, such as labor costs, net pension liabilities (NPLs), and estimated average and marginal labor productivity and efficiency indicators. Results indicate that labor cost disclosing companies command higher equity market values in general, and that labor productivity and efficiency measures appear to be undervalued. Both findings suggest that there might be market opportunities for firms with valuable human capital to differentiate themselves from their industry peers, which might encourage further human capital disclosure in the future. More refined measures of human capital assets and investments are needed to assess firms’ human resource management decisions and performance impacts in the capital markets more adequately.