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

23 Pages Posted: 8 Feb 2018

See all articles by Choong‐Yuel Yoo

Choong‐Yuel Yoo

Korea Advanced Institute of Science and Technology (KAIST)

Tae Hee Choi

KDI School of Public Policy and Management

Jinhan Pae

Korea University Business School (KUBS)

Date Written: January/February 2018

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 in 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 warrant such unfavorable dispositions as new debt freezes and monitoring by regulators, 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, early adoption, IFRS, policy, private firms

Suggested Citation

Yoo, Choong‐Yuel and Choi, Tae Hee and Pae, Jinhan, Demand for Fair Value Accounting: The Case of the Asset Revaluation Boom in Korea During the Global Financial Crisis (January/February 2018). Journal of Business Finance & Accounting, Vol. 45, Issue 1-2, pp. 92-114, 2018, Available at SSRN: https://ssrn.com/abstract=3120056 or http://dx.doi.org/10.1111/jbfa.12266

Choong‐Yuel Yoo (Contact Author)

Korea Advanced Institute of Science and Technology (KAIST) ( email )

373-1 Kusong-dong
Yuson-gu
Taejon 305-701, 130-722
Korea, Republic of (South Korea)

Tae Hee Choi

KDI School of Public Policy and Management ( email )

263 Namsejong-ro
Sejong-si 30149
Korea, Republic of (South Korea)

Jinhan Pae

Korea University Business School (KUBS) ( email )

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

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