The PP&E Revaluations and Market Reactions

Korean firms had been banned assets revaluations since the abolishment of the Asset Revaluations Act in 2000. However, the Korean Accounting Standards Board (KASB) revised the statement of Korean Accounting Standard (SKAS) No.5 on December 30th, 2008, which allows firms to have the option of the PP&E revaluations. Its intent is to relieve the firms' accounting burden, especially high debt ratios, which was caused by recession in 2008. The purpose of this paper is to investigate empirically the economic factors which are apt to affect the PP&E revaluations of Korea listed companies under the revised version of SKAS No.5. Also, we examine market reactions to events related to the announcements of the PP&E revaluations by the revised version of SKAS 5. In order to gain insight into investors' expectation regarding the net cost or benefit of the introduction the PP&E revaluations in Korea, we employ event day that we assess as affecting the likelihood of introduction the PP&E revaluations in Korea. The univariate and multivariate empirical results clearly suggest that firms using the PP&E revaluations are more leveraged than firms using historical costs. It appears that it is used as a method of signaling the firm’s additional borrowing capacity and reducing the likelihood of violating restrictive covenants. Based on this study’s results, the managers' decision of the PP&E revaluations seems to be guided mainly by the need to signal the firm’s financial health, especially its borrowing capacity. When we study market reactions to the announcements of the PP&E revaluations, using the market model, we find significantly positive the cumulative abnormal return from day -2 to 0, from day -2 to +2. It indicates that investors in the Korean stock market react more positively on the announcements when firms release the voluntary reports of the PP&E revaluations. Thus, we can think that if the share price movements were attributable to the PP&E revaluations, then investors in the stock market regard those announcements as information of significance.