Knowledge that Transforms

We find, as predicted, that upward revaluations of fixed assets by UK firms are significantly positively related to changes in future performance, measured by operating income and cash from operations, indicating revaluations reflect asset value changes. Current year revaluations (revaluation balances) also are significantly positively related to annual returns (prices). Relations between revaluations and future performance and prices are weaker for higher debt-to-equity ratio firms, indicating motivation affects how revaluations reflect asset value changes. The relations also are weaker for cross-listed firms and in a more volatile economic time period. Our inferences are robust to controlling for firms' acquisition activity.

The papers by Dhaliwal, Subramanyam and Trezevant (1998)and Vincent (1998)both examine whether stock returns are more highly associated with net income or an alternative measure of firm performance in contexts that are of some current interest to accounting regulators. However, since neither paper does a very good job of motivating their basic economic questions, we are left with results that are not all that interesting or surprising. Both papers would have benefited greatly from a clearer delineation of the economic rationale for their tests and predictions.