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Differential Pricing of Discretionary, Nondiscretionary and Noise Components of Loan Fair Values

July 1999

41 Pages Posted: 2 Feb 1999  

William H. Beaver

Stanford University

Mohan Venkatachalam

Duke University - Fuqua School of Business

Abstract

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.

JEL Classification: C23, G14, M41, M43

Suggested Citation

Beaver, William H. and Venkatachalam, Mohan, Differential Pricing of Discretionary, Nondiscretionary and Noise Components of Loan Fair Values. July 1999. Available at SSRN: https://ssrn.com/abstract=146439 or http://dx.doi.org/10.2139/ssrn.146439

William H. Beaver

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-4409 (Phone)
650-725-6152 (Fax)

Mohan Venkatachalam (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7859 (Phone)
919-660-7971 (Fax)

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