In this paper we examine whether the utilization of independent valuers, particularly high quality independent valuers, provides a credible signal about the underlying reliability of recognized asset revaluations.
Our results provide evidence that independent revaluations are more reliable than those conducted by corporate directors, particularly over the three years after the revaluation. Macroeconomic conditions do not appear to drive the differences in reliability. Larger firms are more likely to incur a subsequent reversal of an upward asset revaluation.
The implication for U.S. standard setters is that allowing director-based revaluations rather than mandating the employment of independent valuers may compromise the reliability of reported asset values.
Our measure of reliability is determined by an analysis of subsequent write-downs of voluntary upward revaluations. While an analysis of subsequent reversals of asset revaluations provides a more direct test of the reliability than do the market returns and future performance tests used in prior research, our tests are not without limitations.
Just as firms will choose if and when to upwardly revalue assets, they also have considerable discretion over the timing and magnitude of subsequent write-downs. This discretion “muddies” the interpretation of our results. Further, it could be that write-downs were precipitated by corporate governance changes — for example, a change in auditor or change in board composition.