Demand for Fair Value Accounting: The Case of the Asset Revaluation Boom in Korea during the Global Financial Crisis

Forthcoming in Journal of Business Finance & Accounting

KAIST College of Business Working Paper

45 Pages Posted: 14 Mar 2013 Last revised: 2 Nov 2017

See all articles by Choong-Yuel Yoo

Choong-Yuel Yoo

KAIST College of Business

Tae H. Choi

KDI School of Public Policy and Management

Jinhan Pae

Korea University Business School (KUBS)

Date Written: June 5, 2017

Abstract

When the fair value accounting (FVA) option for property, plant, and equipment was introduced in the midst of the global financial crisis, a significant proportion of Korean firms elected FVA. We attribute this unusual boom of asset revaluations to the nation’s culture of government intervention and civilian compliance, which was particularly espoused during this period of financial turmoil, and a foreseeable option to switch back to historical cost accounting. We find that among those firms whose debt-to-equity ratios are low, public firms opt for the FVA option more often than private firms, suggesting that the need to communicate fair value information with diversified equity holders is more important than the need to do so with creditors. In contrast, among those firms whose debt-to-equity ratios are high enough to call such unfavorable dispositions as new debt freezes and regulators’ monitoring, we find no difference in the FVA choice between private and public firms. These findings imply that during the global financial crisis, private firms that rely heavily on debt financing have a strong incentive to utilize FVA to comply with government guidelines for the debt-to-equity ratio and to ease a potential hold-up problem by influential creditors.

Keywords: Asset revaluation; Policy; Private firms; IFRS; Early adoption

Suggested Citation

Yoo, Choong-Yuel and Choi, Tae H. and Pae, Jinhan, Demand for Fair Value Accounting: The Case of the Asset Revaluation Boom in Korea during the Global Financial Crisis (June 5, 2017). Forthcoming in Journal of Business Finance & Accounting, KAIST College of Business Working Paper, Available at SSRN: https://ssrn.com/abstract=2232666 or http://dx.doi.org/10.2139/ssrn.2232666

Choong-Yuel Yoo

KAIST College of Business ( email )

85 Hoegiro, Dongdaemoon-gu
Seoul, 02455
Korea, Republic of (South Korea)

HOME PAGE: http://www.business.kaist.edu/faculty/cyoo

Tae H. Choi

KDI School of Public Policy and Management ( email )

P.O. Box 184
Seoul, 130-868
Korea, Republic of (South Korea)

Jinhan Pae (Contact Author)

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
Korea

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