When Voluntary Reporting Choices Are Credible: The Case of Upward Revaluations in Private Firms

We study the circumstances under which voluntary disclosure of private information about a firm’s prospects is credible. Upward asset revaluations signal increased future operating performance to financial statement users. However, upward revaluations may also contain a significant discretionary component, especially when the demand for high-quality financial statements is low. We exploit a peculiarity of the Italian private firm setting, where both the tax cost of upward asset revaluations and the link between the related accounting and tax rules vary over time. We predict and find that upward revaluations are positively associated with operating performance when the net tax cost of upward revaluations and the link between their accounting and tax rules are high. Alternatively, it weakens as tax costs decline, and the link between accounting and tax rules loosens. When the tax cost of upward revaluations is particularly low or free and unrelated to tax consequences, the association between upward revaluations and future performance becomes insignificant or negative. These effects steadily extend over time, highlighting the long-term nature of the revaluation signal. They are associated in different but predictable ways with the quality of financial reporting, the eponymy, and the future economic outcomes of the revaluating firms.