Revaluation of fixed assets and future firm performance: a study on listed Indian companies

Abstract

The paper predicted that the motivation of revaluation of fixed assets undertaken by listed Indian companies was not to present fair value to the users for financial statements and other stake holders but to enhance the firm s equity position. The paper adapted the equations proposed by Davide Aboody et al in their paper titled Revaluations of fixed assets and future firm performance: Evidence from the UK published in 1999 in the Journal of Accounting and Economics to study the prediction in Indian context. The UK study concluded that the firms undertook revaluation without opportunistic motivation and established a positive association between revaluation and future firm performance. This study involved a sample of 306 listed firms selected from BSE 500 index companies and inferred that there existed a negative association between revaluation of fixed assets and future firm performance for the time horizon of three years ahead. Also, the study identified that the interaction of revaluation of fixed assets with Debt Equity ratios (DE) had positive association with future firm performance for the two and three ahead periods. Thus the study concluded that the revaluation exercises undertaken by the sample firms had opportunistic motivation to enhance equity positions The study also extended to examine a listed company as a case study to corroborate the findings.