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Asset Revaluations and the Mitigation of Underinvestment
Author(s) -
WHITTRED GREG,
CHAN YOKE KAI
Publication year - 1992
Publication title -
abacus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.632
H-Index - 45
eISSN - 1467-6281
pISSN - 0001-3072
DOI - 10.1111/j.1467-6281.1992.tb00269.x
Subject(s) - leverage (statistics) , opportunism , debt , economics , asset (computer security) , monetary economics , empirical evidence , perspective (graphical) , mechanism (biology) , finance , market economy , philosophy , computer security , epistemology , machine learning , artificial intelligence , computer science
Asset write‐ups or revaluations are a common feature of Australian accounting and reporting practice. This paper adopts the perspective that efficiency rather than opportunism is the reason for revaluations. It argues asset revaluations are a low‐cost mechanism for mitigating underinvestment problems induced by the presence of risky debt and exacerbated by the manner in which conventional borrowing limitations are written. It is hypothesized that revaluation should be positively related to the presence of growth opportunities, financial leverage and the presence of borrowing limitations; and negatively related to a firm's ability to finance growth internally. The empirical results generally support the hypothesized relationships.