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An anatomy of the Level 3 fair-value hierarchy discount

Author

Listed:
  • Emanuel Bagna

    (Department of Economics and Management, University of Pavia)

  • Giuseppe Di Martino

    (Accounting Department, Bocconi University)

  • Davide Rossi

    (Accounting Department, Bocconi University)

Abstract

We 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.

Suggested Citation

  • Emanuel Bagna & Giuseppe Di Martino & Davide Rossi, 2014. "An anatomy of the Level 3 fair-value hierarchy discount," DEM Working Papers Series 065, University of Pavia, Department of Economics and Management.
    • Handle: RePEc:pav:demwpp:demwp0065
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    File URL: http://dem-web.unipv.it/web/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0065.pdf
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    References listed on IDEAS

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    Cited by:

    1. Hsu, Audrey Wen-hsin & Pourjalali, Hamid & Song, Yi-Ju, 2018. "Fair value disclosures and crash risk," Journal of Contemporary Accounting and Economics, Elsevier, vol. 14(3), pages 358-372.
    2. Emanuel Bagna, 2021. "Is There Any Value in the Banks Brand?," International Journal of Business and Management, Canadian Center of Science and Education, vol. 13(12), pages 261-261, July.

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    More about this item

    Keywords

    Fair value hierarchy; Level 3; liquidity discount; financial instruments;
    All these keywords.

    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

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