Fixed Asset Revaluation and Equity Depletion in the UK

Abstract:     
UK GAAP allows the write-off of purchased goodwill directly to reserves, resulting in the widespread depletion of book equity. Companies are also permitted to revalue fixed assets at management's discretion. This study examines whether revaluations are associated with the depletion of book equity and with other costly contracting explanations identified in prior research. Our results provide strong support for the equity depletion hypothesis, both with regard to the decision to revalue and the timing of the revaluations. Other factors identified in prior research (indebtedness, liquidity, market-to-book, size, fixed asset intensity) are also consistently associated with revaluation.

JEL Classification: M41, M44

working papers series