Asset revaluations and share price behaviour in Australia

McMillan, Marion Jean. (1990). Asset revaluations and share price behaviour in Australia PhD Thesis, School of Business, The University of Queensland.

       
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Author McMillan, Marion Jean.
Thesis Title Asset revaluations and share price behaviour in Australia
School, Centre or Institute School of Business
Institution The University of Queensland
Publication date 1990
Thesis type PhD Thesis
Supervisor Frank Finn
Total pages 215
Language eng
Subjects 350200 Business and Management
Formatted abstract Objectives and Methodology

This is a study of how management uses an accounting procedure, in this case an asset revaluation, to signal to the market information about the firm. An information asymmetry is assumed to exist in the market between managers and investors. Based on Spence's (1973, 1974) signalling model, the study partitions the asset revaluation sample to differentiate the information signals associated with asset revaluations. These include signals related to debt capacity, dividend information and current value information. The study attempts to predict the direction and relative magnitude of share price returns depending on the information content of these signals.

Several hypotheses are developed and tested regarding 1) independent valuations, changes in book value leverage and share price returns; 2) directors' valuations,
asymmetric information and share price returns; and 3) bonus issues, asset revaluations and share price returns. These hypotheses imply that there will be different outcomes depending on the different kinds of asset revaluations. Consequently, the asset revaluation sample is partitioned on the basis of the methods of valuation used by management [independent or directors' valuations] and the classes of assets revalued [land and buildings, plant and machinery. investments and others]. The asset revaluations announced simultaneous with bonus issues are also partitioned.

The study tests for the differences between these groups on the basis of the following attributes: (a) the mean change in earnings per share; (b) the mean change in book value leverage; and (c) the mean cumulative abnormal return.

The Results

The results of this study reveal that not all asset revaluations can be associated with share price revisions. Asset revaluations with simultaneous bonus issue announcements are associated with significant share price returns regardless of the method of valuation used by management. However, asset revaluations without simultaneous bonus issue announcements are not generally associated with significantly positive share price returns. Although, independent valuations without bonus issues cannot be associated with significant share price returns, they tend to be associated with increases in concurrent leverage, whereas directors' valuations without bonus issues tend to be associated with decreases in concurrent leverage.
Directors' valuations without bonus issues also are preceded by negative share price returns. This is with the exception of a small group of directors' valuations of plant, machinery and unlisted investments which has a significantly positive residual in the announcement month. This is possibly due to the joint release of earnings announcements.

The results for the difference between means tests are as follows. There is an insignificant difference between the bonus issue groups, independent and directors' valuations with simultaneous bonus issues. However, independent valuations without bonus issues are significantly different from directors' valuations without bonus issues with respect to the mean change in (a) earnings per share; (b) book value leverage; and (c) the cumulative abnormal return.

There is also a significant difference between the groups, asset revaluations with bonus issues and asset revaluations without bonus issues, regardless of the method
of valuation used. Independent valuations with simultaneous bonus issues have a greater share price return compared with independent valuations without bonus issues, and directors' valuations with simultaneous bonus issues have a greater
share price return compared with directors' valuations without bonus issues.

The results of the regression analysis are as follows. Asset revaluations with bonus issues are different from asset revaluations without bonus issues. The method of valuation is significant in explaining asset revaluations without bonus issues, however it is not possible to distinguish between the bonus issue sub-groups by method of valuation. Earnings is a significant variable in explaining the variation in the share price residuals of firms with asset revaluations. The size of the asset revaluation does not appear to explain any of the variation in the share price return.

Three major results of the study are as follows. First, only asset revaluations with simultaneous bonus issues are associated with significantly positive abnormal
share price changes. Asset revaluations by themselves do not appear to be associated with significantly positive abnormal price changes. Second, directors' revaluations of land and buildings are preceded by significantly negative abnormal price changes. Third, independent valuations without bonus issues tend to be associated with increasing book value leverage whereas directors' valuations without bonus issues tend to be associated with decreasing book value leverage.

These results indicate that asset revaluations appear to be associated with various information signals. There are significant differences between the groups in the analysis with respect to the attributes tested. Management's choice of the method of valuation used, the class of asset revalued, and the timing of the revaluation do not appear to be random events.
Keyword Stocks -- Prices -- Australia
Assets (Accounting)

 
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