The Effect of Asset Revaluation on Capital Costs

Asset revaluation can provide useful and relevant information on the financial statements by representing fair value. It has effects that increasing effectiveness in a capital market and reducing information asymmetry among participants. This article examines the important topic of the effect of asset revaluation on the capital cost(debt and equity cost). Also, this paper examines the effect of asset revaluation based on market response. Capital cost are grouped by two types which are debt and equity cost. Results are followed. First, the informaion of asset revaluation reduces capital cost. This result shows that asset revaluation information is significant to the companies which have a higher capital cost than others. Second, after examing the relationship between asset revaluation information and market response, the information of asset revaluation have a role to mitigate capital cost regardless the market response. Our results show that revaluation gains had a negative impact on the costs of both debt and equity in companies group which show increasing credit rating and price earnings ratio with considering market response. There is no effect in other group. Although asset revaluation information reduces the capjtal cost without market response, the affections of asset revaluation information were strong among the firms that experienced favourable capital market responses, i.e., credit rating upgrades or stock price increases. Our research has a contribution whether fair value accounting which is the aspect of International Financial Reporting Standards has impacts on capital market.