An anatomy of the Level 3 fair-value hierarchy discount
AbstractWe use an integrated approach to analyze the reasons behind the discount on the balance-sheet fair value of illiquid financial instruments held by European banks and classified into the Level 3 Fair Value hierarchy under IFRS 7. We believe that the potential sources of misalignment are 1) the lack of disclosure, 2) earnings management, and 3) the lack of liquidity. We show that the discount implicit in market values is linked to the lack of mandatory additional disclosure required by IFRS 7 and that this result support the strong enforcement activity made by national authorities. We also show that financial markets penalize banks that transfer assets from other fair-value hierarchy levels and that the penalty is due both to the instruments’ drop in liquidity and the opacity of the transfers.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Pavia, Department of Economics and Management in its series DEM Working Papers Series with number 065.
Length: 47 pages
Date of creation: Jan 2014
Date of revision:
Fair value hierarchy; Level 3; liquidity discount; financial instruments;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 2001. "The relevance of the value relevance literature for financial accounting standard setting: another view," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 31(1-3), pages 77-104, September.
- Bosch, Patrick, 2012. "Value Relevance of the Fair Value Hierarchy of IFRS 7 in Europe - How reliable are mark-to-model Fair Values ?," FSES Working Papers, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland 439, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
- Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 1998. "Relative valuation roles of equity book value and net income as a function of financial health," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 25(1), pages 1-34, February.
- Francis A. Longstaff & Arvind Rajan, 2008.
"An Empirical Analysis of the Pricing of Collateralized Debt Obligations,"
Journal of Finance, American Finance Association,
American Finance Association, vol. 63(2), pages 529-563, 04.
- Francis A. Longstaff & Arvind Rajan, 2006. "An Empirical Analysis of the Pricing of Collateralized Debt Obligations," NBER Working Papers 12210, National Bureau of Economic Research, Inc.
- Edward J. Riedl & George Serafeim, 2011. "Information Risk and Fair Values: An Examination of Equity Betas," Journal of Accounting Research, Wiley Blackwell, Wiley Blackwell, vol. 49(4), pages 1083-1122, 09.
- Eccher, Elizabeth A. & Ramesh, K. & Thiagarajan, S. Ramu, 1996. "Fair value disclosures by bank holding companies," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 22(1-3), pages 79-117, October.
- Richard Lambert & Christian Leuz & Robert E. Verrecchia, 2007. "Accounting Information, Disclosure, and the Cost of Capital," Journal of Accounting Research, Wiley Blackwell, Wiley Blackwell, vol. 45(2), pages 385-420, 05.
- Baele, Lieven & De Jonghe, Olivier & Vander Vennet, Rudi, 2007. "Does the stock market value bank diversification?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 31(7), pages 1999-2023, July.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Alice Albonico).
If references are entirely missing, you can add them using this form.