Asset revaluations and assessment of borrowing capacity

Article

Cotter, Julie and Zimmer, Ian. 1995. "Asset revaluations and assessment of borrowing capacity." Abacus: a journal of accounting, finance and business studies. 31 (2), pp. 136-151.
Article Title

Asset revaluations and assessment of borrowing capacity

ERA Journal ID19052
Article CategoryArticle
AuthorsCotter, Julie (Author) and Zimmer, Ian (Author)
Journal TitleAbacus: a journal of accounting, finance and business studies
Journal Citation31 (2), pp. 136-151
Number of Pages16
Year1995
Place of PublicationMelbourne, Australia
ISSN0001-3072
1467-6281
Abstract

Prior research has found support for contracting, political cost and information asymmetry explanations for managements' decision to revalue non-current assets. This study proposes that asset revaluations occur to signal available borrowing capacity via an increase in collateral
values at the time of increases in secured debt and that the economic benefits associated with an asset revaluation will be greatest for firms when they are experiencing times of declining cash flows from operations.
Results imply that firms that have undertaken an asset revaluation are more likely to be experiencing declining cash flows from operations than firms that have not revalued. This study also investigates whether the incidence of valuations coincides with increases in levels of secured borrowings due to lenders' demands for current values of assets offered as collateral. The evidence indicates that firms are more likely to record an asset revaluation if they have increased their secured borrowings, and that most non-year-end revaluations emanate directly from contracting with lenders.

Keywordsvaluation; assets; borrowing; liquidity
ANZSRC Field of Research 2020350103. Financial accounting
350204. Financial institutions (incl. banking)
380304. Microeconomic theory
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Byline AffiliationsFaculty of Business
University of Queensland
Institution of OriginUniversity of Southern Queensland
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