Asset Revaluations and Stock Market Prices

Several recently reported studies have considered whether changes in accounting methods by firms whose securities are publicaly traded have led to any discernible response in the form of shifts in share prices. (I) These studies have been framed in differing terms, and have looked at share price movements under a variety of conditions. But a common finding has been that changes in accounting methods do not appear to have had much of an effect on stock market prices. This paper presents some evidence of changes in accounting method which lead to shifts in stock prices. It describes an examination of movements in share prices of a sample of relatively large Australian public companies which announced upward asset revaluations during the period 1960-70. This examination revealed that announcements of asset revaluations were associated with substantial upward movements in stock prices, and that these shifts in stock prices were generally sustained in the post-announcement months. Furthermore, the stock market appears to digest this new information quickly into stock prices as the adjustment was almost complete at the close of the announcement month. Further analysis suggested that the observed movements in stock prices could not be attributed entirely to such additional information signals as earnings and dividend changes. Nor were the results explained by induced changes in volatility which could conceivably result from the release of revaluation information. Given that the revaluations reflected changes in the worth of assets which had predominantly taken place but had not been recorded during prior accounting periods, then the findings are consistent with claims that the failure of accounting to systematically provide contemporary information about the affairs of firms can deprive the stock market of valuable information and lead to the inequitable treatment of individual investors.