An anatomy of the Level 3 fair-value hierarchy discount

Emanuel Bagna (), Giuseppe Di Martino () and Davide Rossi ()
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Emanuel Bagna: Department of Economics and Management, University of Pavia
Giuseppe Di Martino: Accounting Department, Bocconi University
Davide Rossi: Accounting Department, Bocconi University

No 65, DEM Working Papers Series from University of Pavia, Department of Economics and Management

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.

Keywords: Fair value hierarchy; Level 3; liquidity discount; financial instruments (search for similar items in EconPapers)
JEL-codes: G12 G15 G18 G21 G28 G32 G38 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2014-01
New Economics Papers: this item is included in nep-acc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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