On the Relation between Commercial and Industrial Loan Portfolio Values and Borrowers’ Earnings and Operating Cash Flows
Posted: 29 Mar 2012 Last revised: 1 Dec 2020
Date Written: March 1, 2013
A major difficulty in the analysis of factors that affect loan valuation is that there does not exist a measure of loan values that can be applied to the general population of loans. I use loan quality disclosures from commercial banks’ regulatory filings to construct a measure of realizable values of commercial and industrial loan portfolios. Using this measure, I examine how loan values aggregated to the economy-level respond to aggregate-level shocks to discount rates and borrowers’ earnings and operating cash flows. Several new insights regarding banks’ use of fundamentals in loan valuation emerge. I discuss the relevance and implications of the findings for research on loan quality disclosures, debt valuation, and the association between accounting information and economic outcomes.
Keywords: Loan values, Aggregate earnings, Discount rates, Expected cash flows
JEL Classification: E32, G12, G20, M41
Suggested Citation: Suggested Citation