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Reliability of Asset Revaluations: The Impact of Appraiser Independence

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  • Julie Cotter
  • Scott Richardson

Abstract

In this paper we examine whether there are differences in the reliability of asset revaluations made by boards of directors versus independent (external) appraisers. We use a sample of recognized Australian asset revaluations. As a first step we examine the determinants of the choice between director-based revaluations and those undertaken by independent appraisers. We find that independent appraisers are more likely to be used for revaluations of land and buildings and directors are more likely for investments, plant and equipment and identifiable intangibles. We interpret this as evidence of firms harnessing directors' knowledge of asset specificities. We also find that firms with less independent boards are more likely to use independent appraisers. We interpret this as evidence of substitutability between governance mechanisms. As for differences in reliability, we find that revaluations of plant and equipment that are made by independent appraisers are more reliable than those by directors. However, we are unable to detect a difference for other classes of non-current assets. We define reliability in terms of ex-post adjustments of recognized value increases. Reliability is determined by an examination of the extent to which upward revaluations are subsequently reversed.

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  • Julie Cotter & Scott Richardson, 2002. "Reliability of Asset Revaluations: The Impact of Appraiser Independence," Review of Accounting Studies, Springer, vol. 7(4), pages 435-457, December.
    • Handle: RePEc:spr:reaccs:v:7:y:2002:i:4:d:10.1023_a:1020763612369
    DOI: 10.1023/A:1020763612369
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    References listed on IDEAS

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    1. Bernard, Vl, 1993. "An Investigation Of Revaluations Of Tangible Long-Lived Assets - Discussion," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 31, pages 39-45.
    2. Aboody, David & Barth, Mary E. & Kasznik, Ron, 1999. "Revaluations of fixed assets and future firm performance: Evidence from the UK1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 149-178, January.
    3. DeFond, Mark L. & Subramanyam, K. R., 1998. "Auditor changes and discretionary accruals," Journal of Accounting and Economics, Elsevier, vol. 25(1), pages 35-67, February.
    4. Barth, ME & Clinch, G, 1998. "Revalued financial, tangible, and intangible assets: Associations with share prices and non-market-based value estimates," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 36, pages 199-233.
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    Cited by:

    1. Hans B. Christensen & Valeri V. Nikolaev, 2013. "Does fair value accounting for non-financial assets pass the market test?," Review of Accounting Studies, Springer, vol. 18(3), pages 734-775, September.
    2. Igor Goncharov & Edward J. Riedl & Thorsten Sellhorn, 2014. "Fair value and audit fees," Review of Accounting Studies, Springer, vol. 19(1), pages 210-241, March.
    3. Jennifer Altamuro & Haiwen Zhang, 2013. "The financial reporting of fair value based on managerial inputs versus market inputs: evidence from mortgage servicing rights," Review of Accounting Studies, Springer, vol. 18(3), pages 833-858, September.

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