Does Credible Mean Reliable?

Topics - Equities

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Does Credible Mean Reliable?

Working paper

In this paper we examine whether the utilization of independent valuers, particularly high quality independent valuers, provides a credible signal about the underlying reliability of recognized asset revaluations.

Our results provide evidence that independent revaluations are more reliable than those conducted by corporate directors, particularly over the three years after the revaluation. Macroeconomic conditions do not appear to drive the differences in reliability. Larger firms are more likely to incur a subsequent reversal of an upward asset revaluation.

The implication for U.S. standard setters is that allowing director-based revaluations rather than mandating the employment of independent valuers may compromise the reliability of reported asset values.

Our measure of reliability is determined by an analysis of subsequent write-downs of voluntary upward revaluations. While an analysis of subsequent reversals of asset revaluations provides a more direct test of the reliability than do the market returns and future performance tests used in prior research, our tests are not without limitations.

Just as firms will choose if and when to upwardly revalue assets, they also have considerable discretion over the timing and magnitude of subsequent write-downs. This discretion “muddies” the interpretation of our results. Further, it could be that write-downs were precipitated by corporate governance changes — for example, a change in auditor or change in board composition.

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The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.


Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight.  Hypothetical performance results are presented for illustrative purposes only.


Diversification does not eliminate the risk of experiencing investment loss.


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