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Commercial Lender Judgments and Fair-Value Recognition: An Investigation into the Impact of Future Accounting Standards
Rick C. Warne,
University Of California- - Riverside
ABSTRACT. This paper investigates commercial lenders’ judgments as a result of recognized fair-market valuations. All bankers received disclosed fair-market valuations of non-current assets while two groups also received recognized fair values that either increased or decreased net income. Commercial lenders assigned the highest loan rates when recognized fair values increased net income, which is consistent with the earnings quality and persistence literature. Bankers assigned the lowest loan amounts when recognized fair values decreased net income, which is consistent with the “distance to default” model. Lenders incorporated fair values into their judgments of asset valuations only when that information was recognized. Bankers receiving recognized GAAP and fair-market valuations judged both values equally relevant. When fair values increase (decrease) net income, bankers judged GAAP (fair value) figures as more reliable though both groups received identical balance sheets.
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