Differential Pricing of Discretionary, Nondiscretionary and Noise Components of Loan Fair Values
William H. Beaver
Duke University - Fuqua School of Business
Using a sample of banks, this study examines the capital market pricing implications of three components of loan fair values. We find that the nondiscretionary component is priced on a dollar-for-dollar basis, the discretionary component is assigned a significantly larger multiple and the noise component is not priced. This implies that the relevance and reliability of loan fair values differs across the three components. We offer a signaling interpretation for the larger multiple assigned to the discretionary component. However, one cannot rule out the possibility that the estimated discretionary component proxying for other value-relevant constructs that have a positive pricing implication.
Number of Pages in PDF File: 41
JEL Classification: C23, G14, M41, M43
Date posted: February 2, 1999