Browsing by Author "da Costa, Fábio Moraes"

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    The Commitment to Income-Decreasing Accounting Choices as a Credible Signal to Reducing Information Asymmetry: The Case of Asset Revaluations
    (Wiley, 2020) da Costa, Fábio Moraes; Liu, Carol; Cavalier Rosa, Gina; Tiras, Samuel L.; Kelley School of Business
    Bagnoli and Watts (2005) proposed that a manager could reduce information asymmetry by choosing an income-decreasing accounting choice that signals the firm's relatively good future prospects. A limitation in testing this theory is that most income-decreasing accounting choices over time reverse such that aggregated earnings would be the same, regardless of the choice. One income-decreasing accounting choice that never reverses is the choice of upward asset revaluation, where the resulting gains are recognized through other comprehensive income and reduce future earnings by increasing future depreciation expense. In the United Kingdom, prior to FRS15, firms had the option to upwardly revalue on a one-time basis. FRS15, and subsequently International Financial Reporting Standards, however, require those firms that upwardly revalue precommit to revalue on a consistent basis. This precommitment sacrifices future reporting discretion, which, according to the aforementioned study, serves as a costly signal of a firm's relatively good future prospects that reduces information asymmetry. The choice not to upwardly revalue, therefore, serves as a signal of a firm's relatively poor future prospects and also reduces information asymmetry, but this choice does not require precommitment such that the reduction in information asymmetry would be less than the choice to precommit to upward revaluations. Using a propensity-score matched-pair design on a sample of United Kingdom firms to test our predictions during the period requiring precommitment, we find lower forecast dispersion, lower return volatility, and a lower cost of capital for firms that precommit to upward asset revaluations, relative to those firms that choose not to upwardly revalue their operating assets.
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    The Effects of Fair Value on the Matching of Revenues and Expenses: The Case of Asset Revaluations
    (World Scientific, 2020-12) da Costa, Fábio Moraes; Liu, Carol; Cavalier Rosa, Gina; Tiras, Samuel L.; Kelley School of Business
    Researchers and practitioners have expressed concern that matching has declined over time, as evidenced by a decreasing association between revenues and expenses. They attribute this decline to the shift in financial reporting from a revenue–expense view that emphasizes matching to an asset–liability view that emphasizes the measurement of economic resources that incorporates more fair values. When revenues rise with inflation but the expenses remain tied to historical costs, the two streams tend to diverge. We hypothesize that upwardly revaluing the long-lived fixed operating assets resets the expense stream; thus, changes in revenues will be more closely associated with changes in expenses for firms that revalue than firms that do not upwardly revalue. Based on a sample of United Kingdom firms, we find evidence supporting our expectations, particularly in those higher inflationary industries.