Investigating Market Reaction to Asset Revaluation and Its Effect on Firm’s Access to Financing

Abstract

In this study, we examine the market reaction to the asset revaluation of listed companies. We first estimate the market reaction to the asset revaluation announcement, then explore potential explanations for the market reaction. Asset revaluation can improve firm's access to financing by improving financial ratios. On the other hand, the increase in the firm's capital from the revaluation is accompanied by stock split which results in a decrease in the theoretical share price. This apparent drop in theoretical share prices could induce shareholders' interest as a result of money illusion. To assess these alternative explanations, we run a cross-sectional regression of the cumulative abnormal return on proxies of each factor. To further explore the driver of market reaction, we examine whether firms that have re-evaluated their assets could improve their access to financing or reduce their financing costs. For this purpose, we study a panel of listed companies between 2011 and 2019 for their access to finance, financing cost, investment, and financial leverage, controlling for the firm and year fixed effects. Our results are more consistent with the nominal price reductions causing the market reaction. We do not find evidence of asset revaluations leading to the firm's better access to financing.

Keywords

• asset revaluation
• cumulative abnormal return
• money illusion
• financing constraint