Revaluation of Property, Plant and Equipment (PPE) in Bangladesh: Motivations, Value Relevance, and Effects on Audit Fees

Abstract

Purpose – The purpose of the paper is to identify the characteristics of firms that choose to use revaluation model rather than cost model in Bangladesh. In addition, the paper also tries to understand the reaction of the market given the choice of the revaluation model. Furthermore, the paper tries to figure out the effect of the choice of revaluation model on audit fees. Design/methodology/approach – The paper uses the data from Dhaka Stock Exchange (DSE). Total 65 firms over the period of 2010-2014 were analyzed. Most of the data was collected from S & P Capital IQ database. A small amount of data was collected from the published annual reports of the companies. In order to analyze the data, the paper employs logistic regression model and ordinary least square models. Findings – Hypothesizing both opportunism and efficiency motives, the paper finds that firms with high leverage are not more likely to choose the revaluation model while accounting for PPE, thus rejecting the contracting cost reasons, analogous to opportunistic motivation. Likewise, political cost reason of opportunistic motivation does not appear to be significant. On the other hand, our findings support that efficiency motive is highly significant behind selecting asset revaluation, proving that firms with financial slack or higher percentage of investment in PPE or export sales are highly likely to choose the revaluation model, but firms with growth opportunities, though significant, are not likely to choose revaluation model. Second, given the motivations of managers for choosing the revaluation model, using Ohlson (1995) model, we find that investors do not consider asset revaluation value relevant, proving that investors might perceive the opportunistic motivation of managers. Finally, the paper empirically tests the effects of the use of the revaluation model on audit fees and finds that choosing revaluation model leads to a significant increase in audit fees. This finding supports the hypothesis that the use of the revaluation model involves additional audit effort that merits higher audit fees. Research limitations/implications – Despite the statistical significance of the models, we recognize that there might be some limitations in our study; there might be problem in the specification of variables. In addition, the sample size might not be large enough to give credibility of the findings. Practical implications – The paper helps to identify the firms that are very likely to choose the revaluation model and the implications of such choice in market in an emerging economy. Moreover, the paper also documents the likely costs of such choice. Originality/value – This contribution of the paper adds to audit fee literature and figures out the factors that play role in accounting policy choice in emerging economies.