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European Accounting Review

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Fixed assets revaluations and their association with

stock returns
a b c
Dimitrios C. Ghicas , Dimosthenis L. Hevas & Aphroditi J. Papadaki
a
Athens University of Economics and Business , Greece
b
Athens University of Economics and Business , Greece
c
Athens University of Economics and Business , Greece
Published online: 11 Aug 2009.

To cite this article: Dimitrios C. Ghicas , Dimosthenis L. Hevas & Aphroditi J. Papadaki (1996) Fixed assets revaluations
and their association with stock returns, European Accounting Review, 5:4, 651-670, DOI: 10.1080/09638189600000041

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 The European Accounting Review 1996, 5 4 , 651-670

Fixed assets revaluations and their

association with stock returns
Dimitrios C . Ghicas, Dimosthenis L. Hevas and
Aphroditi J . Papadaki
Athens University of Economics and Business, Greece

ABSTRACT
This study examines the association between annual stock returns of firms listed
on the Athens Stock Exchange and the tax benefits of mandated fixed assets
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revaluations that occurred in the years 1982. 1988 and 1992. A significant
association is found for the revaluations that occurred in 1992 but not for those
that took place in 1988 or 1982 As the tax benefits are probably measured with
error, we use the amount of the revaluation to explain stock retums with similar
findings. When we extend the period over which we accumulate stock returns
from one to two years, the association between stock returns and the amount of the
revaluation is significant both in 1992 and in 1982. For the years 1992 and 1982,
we also observe a significant association between stock prices and the revaluation
amounts.

INTRODUCTION
During periods of inflation, accounting regulators have been concerned with
the dcclining usefulness of historical cost accounting information. Most of
the solutions implemented incorporate a revaluation of fixed assets, with the
changc in value added to a revaluation reserve. The objective of this study is
to examine the association between the revaluation reserve and stock retums
of firms listed on the Athens Stock Exchange. A number of studies (Sharpe
and Walker, 1975; Standish and Ung, 1982; Emanuel, 1989 and Easton et al.,
1993) have examined revaluation reserves and their association with stock
retums for firms in Australia, New Zealand and the United Kingdom. The
primary finding of these studies, with the exception of Easton et al. (1993),
is the absence of an association between stock retums and the revaluation
reserve; Easton et al. (1993) found such an association only when returns
were measured over wider three-year intervals.
The revaluations of fixed assets by Greek firms present a new interesting
aspect: the tax law in Greece allows deduction of the additional depreciation
Address for correspondence
Dcpartmcnt of Business Administration, Athens University of Economics and
Business, 76 Patission Str., Athens 10434, Greece.

O 1996 European Accounting Association 0963-8 180

 652 The European Accounting Review
- - - -

that arises from the revaluation of fixed assets in the determination of taxable
income. Thus, revaluations occurring in Greece have direct cash flow
implications while this was not the case for the revaluations occurring in
other countries. Moreover, the revaluations in Greece were mandated by
legislative ordinances while the revaluations in other countries were made
voluntarily by management.
The primary accounting implications of the revaluation process are an
increase in the book value of the fixed assets and an increase in the owners'
equity. The higher book value of assets generates higher depreciation both
for financial accounting and tax purposes as the different legislative pieces
allowcd tax deduction of the additional depreciation. Lower earnings, higher
total asscts and higher book values of equity provide lower rates of return on
assets and equity as well as lower debt to equity and debt to total assets
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ratios. Higher depreciation for tax purposes results in tax savings and a
higher amount of resources remains in the firm to benefit common
stockholders. Hence, the revaluation of fixed assets has a positive impact on
the cash flows but a negative impact on the earnings of revaluing firms.
In the tests of association between stock returns and the tax benefit of the
revaluation, we control for the change in earnings, the lcvel of earnings, the
dcbt to total assets ratio, the change in cash dividends and the distribution of
bonus shares. We control for the current level of earnings and the change in
carnings because both earnings variables play an important role in security
valuation; see, for example, Easton and Harris (19911). Moreover, earnings,
starting with the year of the revaluation, are affected by the higher
depreciation of the revalued fixed assets. The debt to total assets control
becomes nccessary because previous research (Brown et al., 1992; Hender-
son and Goodwin, 1992 and Whittred and Chan, 1992) has shown that firms
which voluntarily revalue their assets try to improve their borrowing capacity
and/or to decrease the bankruptcy costs associated with possible violations of
lcnding agreements. Furthermore, Brown and Finn (19801, commenting on
the findings of Sharpe and Walker (1975) that revaluations influence share
prices, point out the lack of adequate controls for other variables such as cash
dividends and announcements of stock dividends. This study will control for
cash dividend changes and distribution of possible stock dividends because
both can signal higher future earnings.
The empirical tests of this study involve the development of multiple
rcgrcssion modcls for a cross-section of industrial firms listed on the Athens
Stock Exchange. Multiple regression models are developed for each of the
years 1982, 1988 and 1992 when legislation was passed that mandated the
revaluation of fixed assets only in these years. The relevant laws clearly
specified the adjustment rates that had to be used for the revaluation of
different groups of assets and in this sense provided new information to the
stock market.
 The empirical findings reveal a significant positive association between
annual stock returns and the tax benefit of the revaluation only in 1992. There
is also a positive association between stock returns and the change in cash
dividends both in 1988 and in 1982, while the debt to assets ratio is
negatively associated with stock returns in 1982. Similar findings are
reported when we use the total amount that arises from the revaluation of
fixed assets instead of the tax benefit of the revaluation. These findings
suggest that the tax benefit of the revaluation is an important signal of the
future level of earnings only in 1992, while in 1988 and in 1982 the change
in cash dividends and the level of debt offer more compelling signals about
future camings than the tax bcnefit of the revaluation. When stock returns are
measured over the year of the revaluation and the prior year, a significant
positive association between stock returns and the revaluation amount is
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present both in 1992 and in 1982.

The study also examines the sensitivity of the findings to the functional
form of thc model as it has been suggested by Kothari and Zirnmerman
(1995). A new model with the market price per share as the dependent
variablc and the book value as well as the revaluation amount as the
independent variables is estimated. In this last model, a significant positive
association between market prices and the revaluation amount is present both
in 1992 and in 1982, a finding consistent with that observed when stock
returns were measured over the year of the revaluation and the prior year.
Thc remainder of this study is organized as follows: thc next section
presents the institutional aspects of fixed assets revaluations in Greece. This
followed by a section which develops the economic implications of the
revaluations and their effect on stock returns. The fourth section discusses the
regression modcls that test for the presence of association between stock
rcturns and thc tax benefits of the revaluations after controlling for other
rclevant variables. The fifth section presents the empirical findings from these
regression models followed by a concluding section.

INSTITUTIONAL ASPECTS OF FIXED ASSETS

REVALUATIONS
During periods of high inflation, accounting regulators have been concerned
that historical cost accounting information may not be useful and have
proposed a number of solutions to make historical accounting numbers useful
for decision making. In thc United States, Statement of Financial Accounting
Standards (SFAS) 33 required supplementary disclosure on the current cost
and the price level adjusted historical costs of certain income statement and
balance sheet items; these disclosures are no longer mandatory under SFAS
89 which was adopted in 1986. In the UK, Statement of Standard Accounting
Practice (SSAP) 16 adopted the current cost approach for the preparation
of financial statements, which were reported either as primary financial
 654 The European Accounting Review

statements or as a supplement to the historical cost statements; SSAP 16 was

also withdrawn in 1988. The European Union Fourth Directive (1978). which
discusses the elements of the financial statements and their valuation, allows
member states, under Article 33, to authorize the disclosure of supplemental
information such as 'replacement value accounting', 'general purchasing
power accounting', or periodic revaluations to reflect the effects of price
changcs on historical costs. Greece, a member state of the European Union,
has opted for periodic revaluations of fixed assets. These revaluations
increase the depreciable cost of the fixed assets and create a revaluation
rescrve. The revaluation reserve is subsequently converted into permanent
capital and new shares are distributed as a stock dividend.
The study focuses on revaluations that occurred under the laws 124911982
and 206511992 and the executive order 2665184122-2-1988, which address
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revaluations of land and buildings. The three legislative pieces have certain
common characteristics which are presented next. First, they introduce
adjustment rates that become publicly known with the enactment of the new
laws. The laws specify different rates for assets that were acquired at
diffcrent dates. The adjustment rates are used to determine the adjusted cost
of the asset (adjusted cost = acquisition cost x adjustment rate) and the
adjustcd accumulated depreciation (adjusted accumulated depreciation =
accumulated dcprcciation based on acquisition cost x adjustment rate).' The
differcnce bctween the adjusted cost and the adjusted accumulated deprecia-
tion gives the adjusted net book value of the assets which arises from the
revaluation process, while the difference between the adjusted book value of
the fixed assets and the book value based on historical cost gives the total
amount of the revaluation. As the acquisition dates and the book values of the
diffcrent assets are not publicly known, the revaluation amount becomes
public information only with the release of the financial statements. The total
amount of the revaluation first reduces any existing losses carried forward
from prior periods and the remainder appears in the owners' equity section of
the balance sheet as a revaluation r e s e r ~ e .This
~ reserve is converted into
permanently contributed capital either with an increase in the par value of the
old shares or with the issuance of new shares which are distributed as stock
dividend.

ECONOMIC IMPLICATIONS OF THE REVALUATION

The tax benefits of the revaluation
Thc increase in the dcpreciable cost of fixed assets, attributed to the
revaluation of the historical cost, will generate new benefits, which start first
in the year of the revaluation and continue in subsequent periods. These
benefiw will take the form of lower tax payments when the higher
deprcciation will be deducted from revenue in the determination of tax-
 Fixed assets revaluations 655

able income. In an efficient market, the benefits from the decline of current
year tax payments and the expected benefits from the decline of future tax
payments will be incorporated in stock returns when the revaluation becomes
publicly known, i.e., the year of the revaluation. Hence, a positive association
is expected between stock returns and the anticipated cash flow effect of the
revaluation, i.e., the tax savings of the re~aluation.~
On the other hand, a negative association between stock returns and the
cumulative after tax effect of the revaluation on earnings would imply that
investors interpret the revaluation in a 'naive' fashion. The 'naive investor'
hypothesis suggests that investors place emphasis on the lower income
numbers, which arise from the higher depreciation expense, and ignore the
tax savings of the revaluation; see, for example, Watts and Zimrnerman
(1986), chapter 4, and Biddle and Lindahl (1982).
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The change in earnings and the level of earnings

Ball and Brown (1968). Beaver, Clark and Wright (1979) and Beaver,
Lambert and Morse (1980) have demonstrated that unexpected earnings are
posilivcly associated with stock returns. Since the revaluation process affects
the earnings of the first year that becomes mandatory, a control for
unexpected earnings in the association tests between stock returns and the
cash flow effect of the revaluation becomes necessary. As the stock market
may have developed an expectation from the past history of permanent
earnings, which was not affected by the revaluation, unexpected earnings are
estimated on the basis of earnings computed 'as if' the revaluation had not
taken place. Hence, the after tax effect on earnings of the incremental
depreciation due to the revaluation is added to the reported earnings number
of the revaluation year. Expected earnings for the revaluation year are set
equal to actual earnings of the year before the revaluation, i.e. earnings are
assumed to follow a random walk process. In addition, the study will control
for the level of earnings of the revaluation year because Easton and Harris
(1991) found that both the level of earnings and the change in earnings play
an important role in security valuation.

The benefits of improved borrowing capacity

The revaluation of fixed assets, by increasing total assets and owners' equity,
improves the debt to total assets and the debt to equity ratios. A decrease in
these ratios implies both an improvement in the borrowing capacity and a
reduction in the possibility of bankruptcy for the revaluing firms. An
improvement in the borrowing capacity will arise primarily from the higher
value of the assets that can be placed as collateral. This implies more
collaterized loans, lower cost of capital and an ability to undertake positive
net present value projects that the revaluing company may not have been able
 656 The European Accounting Review

to undertake otherwise. The primary beneficiaries of these actions are the

shareholders of the revaluing firm.
A reduction in the probability of bankruptcy will occur if there are lending
agrcements that specify certain levels of debt to assets or debt to equity ratios
and the revaluing company is very close to violating the stipulations of these
agreements. The revaluation of fixed assets offers a very low cost solution to
a possible violation of the lending agreement while other solutions like
negotiation of the agreement, retirement of the debt or the payment of higher
interest rates are probably more expensive. As a result, the higher the debt to
total assets ratio (or the debt to equity ratio), the higher the benefits to the
stockholdcrs from the revaluation and a positive association is expected
bctwccn the ratio and stock returns for the year of the revaluation. Consistent
with this expectation is the evidence reported by Brown el al. (1992) and
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Whittrcd and Chan (1992) who find that firms with high debt to total assets
ratios voluntarily revalue their assets.

The stock and cash dividends

Conversion of the revaluation reserve into permanent capital via the
distribution of bonus shares is an event with no effect on the wealth of
stockholdcrs as their percentage ownership of common shares remains the
same both before and after the distribution of the stock dividend. It has been
suggcsted (see, for example, Henderson and Goodwin, 1992) that voluntary
asset revaluations followed by stock dividends signal higher future earnings.
Highcr future earnings will be needed to support the distribution of a higher
or even the same dividend to a larger share base. The mandatory revaluations
of this study which will be followed by stock dividends can also signal an
ability of the revaluing firm to direct a larger amount of resources for the
payment of cash dividends. The tax savings that result from the revaluation
of fixed asset can definitely support the payment of at least the same or
higher cash dividend to a larger share base. This study will examine whether
rcvaluing firms experience an increase in cash dividend payments and
whether the increase in cash dividends along with the forthcoming disuibu-
tion of bonus shares are viewed as positive signals by the stock market
rcgarding the future prospects of the revaluing firm.

STATISTICAL TESTS AND THE SAMPLE

The regression models
To examine the association between stock returns and each of the variables
suggested in the previous section, we develop the following regression
model:
 Fixed assets revaluations 657

SR, = a. + a,TS, + a,hEPS, + %LEPS, + a4 ( D: ) + a s ~ i v ,

+ a$D, + E,
The dcpendent variable stock return is measured as follows:

As the test period for the computation of Stock Returns, (SR,), starts six
months bcfore the end of the revaluation year and ends six months after, PI-,
is the common stock price six months before the end of the revaluation year
and P, is the common stock price six months after, while Div, is the dividend
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for the revaluation year paid in the first six months of the subsequent year.
The use of a test period that starts six months before and ends six months
aftcr the fiscal year end is expected to capture all the value relevant
information about the revaluation which is released through the published
financial ~tatcments.~
Thc indcpendent variables are measured as f o l l o ~ s : ~
(Revaluation Amount), x ETR,
TS, =
(Number of Shares),-, x P,,

(Income Tax Expense),

ETR, =
(Pretax Income),

EPS, + DEP, x (1 - ETR,) - EPS,,

UPS, =
PI-,
EPSI
LEPS, = -
PI-,
EPS, and EPS,-, are the reported earnings per share of the years t and t-1
rcspectivcly that have been adjusted retroactively for stock splits and stock
dividends.
DEP, is the additional depreciation per share for year t due to the
revaluation.

(2) (Book Value of Debt),

= ( ~ w Value
k of Assets),

The book value of assets includes the amount of the revaluation.

Div, - Div,-,
Uiv, =
PI-,
 658 The European Accounting Review

Div, and Div,, are the dividends paid for the fiscal years t and 1-1
respectively and SD, is a dummy variable that takes the value of 1 if there is
a revaluation reserve in the owners' equity (which by the law must be
converted into common stock via the distribution of bonus shares) and 0
otherwise (i.e., the amount of the revaluation has been used to absorb income
statement losses).
As the tax rates of future periods over which the benefits of the revaluation
will arise and the number of these periods are not known in the year of the
revaluation, the tax savings variable, (TS,), is probably measured with
A possible solution to this problem is the use of the total amount of
the revaluation as an independent variable instead of the tax savings. The
new variable is measured as follows:
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(Revaluation Amount),
RA, =
(Number of Shares),, x B,,

and we estimate the following regression model:

Easton, Harris and Ohlson (1992) have shown that the explanatory power
of regression models with stock returns as the dependent variable increases as
the period over which the stock returns are accumulated also increases. This
study uses a wider two-year interval for the estimation of stock returns
because the stock market incorporates some information a b u t general or
specific price level changes earlier than the accounting system. The
accounting system reports inflation adjusted information a b u t fixed assets
with substantial delay and only when the regulators request that this
information must be reported, a rather infrequent event that occurred only in
the years 1982, 1988 and 1992. The dependent variable, (AISR,), is therefore
measured as follows:
P, + Div, + Div,-, - P,,
NSR, =
PI-2

and we estimate the following regression model:

NSR, = a. + a,NRA, + a,WEPS, + a3NLEPS, + a4

+ a6SDl +
(g) + a5WDiv,
(3)
The independent variables of the regression model (3) are measured as
foliows:
 Fixed assets revaluaiions 659

(Revaluation Amount),
NRA, =
(Number of Shares),, x PI-,

EPS, + DEP, x (1 - ETR,) - EPS,,

ANEPS, =
4-2

EPS, + EPS,,
NLEPS, =
PI-,
(Book Value of Debt),
($1 = (Book Value of Assets),
Div, - Div,,
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ANDiv, =
PI-,
and SD, is the dummy variable that takes the value of 1 if there is a
revaluation reserve in the owners' equity and 0 otherwise. P, is the common
stock price eighteen months bcfore the end of the revaluation year. EPS,,
and Div,, are the earnings per share and the dividends per share respectively
of the fiscal year 1-2.

The sample
This study uses only industrial firms listed on the Athens Stock Exchange
(ASE). Listing on the exchange was necessary for the estimation of stock
returns. Stock prices for the estimation of annual stock returns were hand
collcctcd from ASE trading records. Financial statement information for the
estimation of the different variables was also hand collected from financial
slatcmcnts that appeared in the business press. Financial statements must be
rclcased at lcast 20 days bcfore the annual stockholders meeting (Law

Table 1 Industry composition of sample

Industry 1982 1988 1992

Textiles
Chemicals
Building Materials
Metallurgical
Food & Spirits
Flour Mills
Miscellaneous

Total

Source: Athens Stock Exchange

 660 The European Accounting Review
Table 2 Descriptive statistics

(Revaluation Amount)/TA,
Mean 0.101* 0.152* 0.139*
Median 0.069 0.132 0.117
(Revaluation Amount)lBV,
Mean 0.196* 0.293* 0.333*
Median 0.125 0.247 0.348
RAl
Mean 0.155* 0.511* 1.335*
Median 0.099 0.244 0.607
IS,
Mean 0.023* 0.050* 0.176*
Mcdian
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SR,
Mcan
Median
AEPS,
Mean
Mcdian
LEPS,
can' -0.040 -0.276 -0.485
Mcdian 0.023 0.075 0.066
DITA,
Mean 0.440* 0.488' 0.597*
Median 0.414 0.457 0.616
A(DjTAS
Mean -0.047* -0.0748 -0.087*
Mcdian -0.024 -0.064 -0.079
Uiv,
Mean -0.013 0.006 -0.017***
Mcdian 0.006 0.000 0.000
EfR,
Mean 0.192* 0.193* 0.219*
Mcdian 0.215 0.154 0.081
SD,
% of 1's 83% 78% 83%
NSR,
Mean -0.072 1.390" 0.11I***
Mcdian -0.516 1.033 0.510
NRA ,
Mean 0.134* 0.785' 1.362*
Median 0.066 0.450 0.572
ANEPS,
Mean -0.062** 0.195 -0.556***
Median -0.016 -0.026 -0.044
NLEPS,
Mean -0.035 -0.337 -0.523
Mcdian 0.017 0.082 0.058
ANDiv,
Mean -0.014* 0.025*** -0.006
Median -0.004 0.000 0.000
 Fixed assets revaluations 66 1

2190/1920) which must take place within six months after the fiscal year end.
The use of annual testing periods for the estimation of stock returns, which
end six months following the fiscal year end, is expected to capture all the
value relcvant information related to the enactment of new legislation
allowing the revaluation of fixed assets as well as the information released
through the published financial statements. The financial statements are the
only source of information reporting accurately the revaluation amount.
The sample of firms consists of 59 firms for the calendar year 1982, 46
firms for the year 1988 and 58 firms for the year 1992. We were unable to
locate thc financial statements of thirteen firms in 1988 and one firm in 1992
on thc business press. Table 1 shows the industry composition of the sample
by calendar year, and reveals the absence of concentration on a specific
industry.
Table 2 provides univariate statistics for the revaluation amount as well as
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the rcmaining variables of this study. The revaluation amount as a proportion

of total asscts is highest in 1988 (15.20%) and lowest in 1992 (10.10%),but
the rcvaluation amount expressed as a percentage of the book value of equity
is highest in 1982 (33.30%) and lowest in 1992 (19.60%). The revaluation
amount as a percentage of the market value of equity. (RA,), is also highest
in 1982 (133.50%)and lowest in 1 9 9 2 (15.50%).The tax savings, (TS,), that
could arise from the revaluation also reach the highest level in 1982 (17.60%)
and thc lowesl in 1 9 9 2 (2.30%).
Stock returns measures over one year, (SR,), are significant in all three
years, rcaching the highest level in 1988 (24.20%) and the lowest in 1982
(8.40%). The mean return, (SR,), in 1992 is 15.80% and the median is
-7.80%. which suggests that the mean return in 1992 has been influenced by
a few large positive observations. The change in earnings, (AEPS,), and the
level of earnings, (LEPS,), are insignificant in all three years. The debt to
total assets ratio, (D,ITA,), reflects a decline in the use of debt from 1982 to
1992. A comparison between the DjTA, ratio based on reported numbers and

* Statistically significant at a = 0.01 (two-tail test);

** Statistically significant at a = 0.05 (two-tail test);
*** Statistically significant at a = 0.10 (two-tail test);
TA,: Total assets for year 1; BV,: Book value of equity for year r; RA,: Revaluation amount for
year tl(No. ~fsharcs,~*P,_,); P,: The common stock price six months after the end of fiscal year
1; Div,: The divided per share for fiscal year r, TS,: [(Revaluation Amount for year 1) * ETR,]/
(No. of shares,-,*P,,); IYR,: (Tax expense)J(Pretax income); SR,: (P,+Div,-Pel)lP,-,; UPS,:
(EPS,+[DEP,* (I-mR,)]-EPS,,)IP,,; DEP,: Additional depreciation per share due to the
revaluation for year I; EPS,: (Earnings per share); LEPS,: EPSJP,,; (DITA,): (Book value of
debt)j(Total assets),; A(DflA,): (DJTAJ-(Dj(TA,-TRAJ); Dl: Book value of debt for year t;
TRA,: Revaluation amount for year r; h[)iv,: (Div,-Div,,)/P,-,: SD,: 1 if bonus shares wiU be
distributed, 0 otherwise; NSR,: (P,+D~v,+D~v,~-P,J/P,~; NRA,: Revaluation amount for year t/
(No. of share~,~*P,~);ANEPS,: (EPS,+[DEP,*(l-~Rl]-EPS,z)/Pl~2; NLEPS,: (EPS,+EPS,-I)/
Pc2; ANDiv,: (Di~,-Div,~)/p,~
 662 The European Accounting Review

the same ratio computed 'as if' the revaluation had not taken place reveals
that the revaluation process caused a decline in the ratio [A(DflA,)] by
8.70% in 1982,7.40% in 1988 and 4.70% in 1992. The change in dividends,
(ADiv,), is significant only in 1982, while the proportion of firms that will
distribute stock dividends, (SD,), is 83% in 1992, 78% in 1988 and 83% in
1982. The effective tax rate, (ETR,), is approximately 20% each year.
Stock returns over the two-year period, (NSR,), are significant in 1988 and
in 1982 and higher than the respective one year measures, (SR,). The change
in earnings over the two years, (ANEPS,), is negative and significant in 1992
and in 1982, while the new measure of the level of earnings, (NLEPS,), is not
significant. The change in dividends over the two years, (hNDiv,), is
significant and negative in 1992 but positive in 1988. The changes in
dividends, (ANDiv,), are in the same direction but of lower magnitude than
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the respective changes in earnings, (ANEPS,).

THE EMPIRICAL FINDINGS

Tablcs 3.4 and 5 present empirical results for the regression models 1 , 2 and
3 respectively. At the bottom of each table we report the mean coefficient for
each variable across the three years as well as the t-statistic that tests whether
the mean coefficient is different from zero; see Fama and MacBeth (1973),
for the use of this test.8
Table 3 presents the empirical results of the regression model (1). This
model was estimated for each year that a revaluation took place. In the
rcgrcssion model of the year 1992, we observe that only the tax savings,
(TS,), variable is positively associated with stock returns at the 0.05 level of
significance and all the remaining independent variables are insignificant. In
the regression model of the year 1988, the change in cash dividends, (ADiv,),
is significant at the 0.01 level of significance and all the other independent
variables, including the tax savings, (TS,), are insignificant. In the regression
model of the year 1982, the change in cash dividends, (AQiv,) is positively
associated with stock returns at the 0.10 level of significance, while the debt
to assets ratio, (DPA,), is negatively associated with stock returns at 0.10
level of significance. The negative effect of debt on stock returns is probably
due to the very high level of debt that companies carried in 1982. These
companies drastically reduce their debt in subsequent periods, as Table 2
shows, and the debt to assets, (DPA,), ratio becomes insignificant in the
regression models of 1988 and 1992.9 In essence, the new depreciation tax
shield due to the revaluation of fixed assets reduces the tax efficiency of debt
and could be directing companies to reduce their level of debt.
Table 4 presents the empirical results of regression model (2) with the
revaluation amount, (RA,), as an independent variable instead of the tax
savings, (TS,). The revaluation amount, (RA,), is significant in 1992 at the
0.06 level of significance, but not in the other years. The remaining variables
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Fixed assets revaluations 663

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Table 4 The regression model (2): SR,= ~ + a , R A , + ~ b E P S , + a ~ E P S 1 + a 4 ( D F A , ) + a , h D l

Year % QI a, oL, a4 as a6 R2-Adj F-stat

1992 -0.343
(-1.05)"
1988 0.087
(0.36)
1982 0.210
(0.89)
Mean-Coeff. -0.015
(-0.09)

'Numbers within parentheses indicate I-statistics;

* Significant at the 0.01 level of significance for two tail t e s ~
**Significantat the 0.05 level of significance for two tail test;
++*Significant at the 0.10 level of significance for two tail test.
SR,: (P,+Div,-P,,)lP,,; R.4; (The revaluation amount for year t)/(No. of Shares,,oP,,); AEPS,: (EPS,+ [DEP,s (I-ETR,)] - EPS,,)IP,,; ETR; (Income
Tax expense), / (Pretax income),; DEP; Additional depreciation for year I due to the revaluation; EPS,: @(Earningsper share); LEPS,: EPSIP,-,; (DITAJ:
(Book value of debt), / (Book value of total assets), hDiv,: (Div,-Div,,)/P,,; SD,: 1 if bonus shares will be distributed, 0 otherwise.
 Table 5 The regression model (3): NSR, = a,,+a,NRA,+a,ANEPS,+aJVLEPSI+a4(D/rAI)+04ANDivI+a6SD,
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Year ao QI 9 % a4 as % R2-Adj F-stat

1992 -1.032 2.914 0.725 -0.787 0.166 3.576 0.679 0.1004 2.061***
(-1 -66)' (2.83)* (0.45) (-0.49) (0.19) (0.63) (1.27)
1988 1.001 -0.078 -0.030 -0.060 -0.400 9.277 0.507 0.3774 5.54SC
(1.59) (-0.30) (-0.24) (-0.35) (-0.42) (5.45)* (0.90)
1982 0.021 0.060 -1.204 1.125 -0.183 4.001 0.073 0.5428 12.478*
(0.10) (1.72)*** (-4.10)* (4.09)* (-0.68) (6.98)* (0.43)
MeanCoeff. -0.003 0.965 -0.170 0.093 -0.139 5.618 0.420
(-0.01) (0.99) (-0.30) (0.17) (-0.84) (3.06)* (2.33)*

Numbers within parentheses indicate I-statistics;

* Significant at the 0.01 level of significance for two fail test
** Significant at the 0.05 level of significance for two tail tesq
*** Significant at the 0.10 level of significance for two tail test
NSR; (P,+Div,,-P,,)/P,; NRA,: (The revaluation amount for year t)/(No. of Share~,~tP,-J;ANEPS,: (EPS,+ [DEP,* (I-mR,)] - EPS,JIP,,; ETR,:
(Income Tax expense), / (Pretax income); DEP; Additional depreciation for year t due to the revaluation; EPS; (Earnings per share); NLEPS; EPS/P,-2;
(DPA,): (Book value of debt), / (Book value of total assets); ANDiv; (Div,-Div,J/P,-j SD,: 1 if bonus shares will be distributed, 0 othwwise.
 666 The European Accounling Review

that were significant in Table 3 are still significant in Table 4, i.e., the change
in dividends, (ADiv,), in 1988 and in 1982, and the debt to assets ratio, ( D /
TA,), in 1982. In essence, the only finding that changes is the size of the
coefficients when the tax savings variable, (TS,), is replaced by the amount of
the rcvaluation, (RA,). The coefficient declines from 5.018 in Table 3 to
1.223 in Table 4 when the tax benefits variable is replaced by the relatively
higher revaluation amount.
As suggested by Easton, Harris and Ohlson (1992). we estimate the
regression model (3) with stock returns accumulated over the year of the
revaluation and the prior year. (NSR,), to increase the explanatory power of
modcl (2). Table 5 presents the empirical results of model (3) and the R-
squared indccd increases in all three years when compared to the R-squared
of modcl (2). The amount of the revaluation, (NRA,), is now significant both
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in 1992 and in 1982. The significance of the revaluation amount for the year
1982 in Table 5 but not in Table 4 suggests that stock returns over wider
intervals capture information about price level changes in a more timely
fashion, while the accounting system measures and reporbs that information
with substantial dclay. Thc change in cash dividends. (QNDiv,), is significant
in 1988 and in 1982. The level of earnings (NLEPS,), and the change in
carnings (ANEPS,), appear also significant in 1982, but the change in
earnings with a negative sign."
Collinearity diagnostics, condition indices higher than six, as suggested by
Belsley el al. (1980), indicate the presence of linear dependencies among the
variables that measure the revaluation amount, the change in earnings and the
level of earnings, in Tables 4 and 5 for the year 1982. Diagnostic tests that
detect the presence of outliers, also suggested by Belsley a d.(1980), show
that thc primary findings reported in Tables 3, 4 and 5 were not sensitive to
the presence of such observations. In addition, we used White's (1980)
hctcroscedasticity consistent covariance matrix, which corrects for the
presence of heteroscedasticity, to estimate I-statistics. The findings of Tables
3, 4 and 5 were not materially affccted by this estimation procedure except
the variables of Table 3: change in earnings (MPS,), for the year 1992, and
tax savings (TS,), for the year 1988. The significance of the tax savings
variable with a negative sign suggests that this variable probably acts as a
proxy for other tax shields that may have been eliminated in 1988.
Kothari and Zimmerman (1995) recommend the use of both prices and
stock returns as dcpendent variables in regression models to examine the
sensitivity of the research findings to the functional form of the model. This
study examines the sensitivity of the findings by estimating the following
regression modcl:
P, = a, + a,BVl + %SRA, + E, (4)
Thc variables of this model are measured as follows: B, is the common stock
price per share six months after the end of the revaluation year I; BV, is the
 Fixed assets revaluations 667
Table 6 The regression model (4): PI = a,+a,BV,+RA, .

Year cl,

1992 486.164
(1.23)'
1988 1886.949
(1.68)***
1982 86.980
(0.80)
Mean- Coeff. 820.03
(1 .SO)

'Numbers within parentheses indicate f-statistics;

* Significant at the 0.01 level of significance for two tail tesest;
** Significant at the 0.05 levcl of significance for two tail test;
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*** Significant at the 0.10 level of significance for two tail test;
P,: Market price per share six months after the end of the revaluation year I; BV,: Book value
of equity minus the revaluation amount for fiscal year f on a per share basis; SRA,: The
revaluation amount per share for fiscal year f.

book value per share of owners' equity at the end of the revaluation year t.
This measure excludes the effect of the revaluation amount on owners'
equity. SRA, is the revaluation amount per share at the end of the revaluation
year t.
Empirical findings from the estimation of the regression model (4) appear
in Table 6. These findings show a significant positive association between
stock prices and the revaluation amount per share both in 1992 and 1982,
evidence consistent with that reported in Table 5. This evidence suggests the
absence of sensitivity of the findings to the functional form of the model.

SUMMARY AND CONCLUSIONS

This study examined fixed assets revaluations occurring in Greece and
accompanied with real cash flow effects. The main interest of the study is the
association between annual stock returns of firms listed on the Athens Stock
Exchange and the tax benefits of mandated fixed assets revaluations that
occurred the years 1982, 1988 and 1992. A significant association was found
for the revaluations that occurred in 1992 and not for these that took place in
1988 or 1982. As the tax benefits were probably measured with error, we also
used the amount of the revaluation to explain stock returns with similar
findings. When we extended the period over which we accumulated stock
returns from one to two years, the association between stock returns and the
amount of the revaluation was significant both in 1992 and 1982. A
significant association between stock prices and the revaluation amount was
also observed in 1992 and in 1982. From the control variables, the change in
cash dividends is more systematically associated with stock returns, evidence
 668 The European Accounling Review

suggesting that the stock market views cash dividends changes as more
rcliable signals of future cash flows.
The evidence of this study, which is consistent with h a t reported by
Easton el al. (1993). suggests that information about fixed asset revaluations
cannot be easily dismissed as worthless in the determination of stock retums.
This is particularly true when stock returns are measured over two-year
intervals that capture past price level changes in a more timely fashion. In
contrast, mandated fixed assets revaluations measure the effect of price level
changes on fixed assels and report information with substantial delay. The
difficulties of measuring the future tax benefits and identifying the un-
expected component of the revaluation are probably the most important
factors contributing lo the insignificant associations in certain years.
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NOTES
Thc authors acknowledge the valuable comments of the editors, Anne Loft and Peter
Walton, as well as those of John Board, George Karathanassis, Ted Sougiannis, two
anonymous referees and participants at the 1995 EIASM workshop on Corporate
Financial Communication and the Stock Market.

The adjusted cost of the assets must not exceed the values assessed by the
department of taxation of the Greek State. If the assessed values by the
department of taxation represent current market values of the assets, then the
adjustment rates approximate specific price level changes in the markets where
these assets are traded.
The auditors' opinion refers only to the first year effect of the revaluation on
earnings.
The tax savings of future periods must be estimated by stock market participants
the first year a new law is enacted. If the benefits of future periods turn out to
be different than expected, then a stock price correction will occur in future
periods. Hence, the correction associated with a past revaluation can occur the
same calendar year ihat a new revaluation occurs, and this correction will
introduce noise in the association between stock returns and the tax benefits of
the new revaluation.
The use of annual periods for the measurement of stock returns does not
preclude the effect of other forms of regulation or other economic events on
stock retums.
The revaluation amount is equal to the adjusted book value minus the historical
cost book value of the fixed assets.
Measurement error also arises if the measure of tax savings used by this study
differs from the amount expected by the market, which is assumed to be zero in
this study.
Beaver and Landsman (1983) mention that both current cost and price level
adjusted historical cost numbers are affected by measurement error.
We also performed a Z-test that tests for the significance of the t-statistics across
the three years. The Ztests correct for cross-sectional and serial correlation; see,
for example, Rarth (1994), and Healy er al. (1987). The findings from the Z-tests
were similar to those reported for the (-tests that test for the significance of the
mean coefficients.
 Fixed assets revaluations 669

9 We also used the ratios debt to book value of equity and debt to book value of
total assets reduced by the revaluation amount with identical findings.
10 The level of earnings (NLEPS,), and the change in earnings (ANEPS,), become
also significant in 1992 after the elimination of two outlying observations but all
the remaining findings remain as they are reported in Table 5.

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