Information risk and fair value
Subtitle: an examination of equity betas and bid-ask spreads
By: Edward J. Riedl, George Serafeim
Contributors: Serafeim, George; Harvard Business School
Series: Working paper / Harvard Business School -- 10-008; Working paper (Harvard Business School) -- 10-008.
Publisher: Harvard Business School
Published: 2009
Place of publication: [Boston]
Language: eng
Number of pages: 41
Description: Finance theory suggests that information risk—that is, the uncertainty regarding valuation parameters for an underlying asset—is reflected in firms' equity betas and the information asymmetry component of bid-ask spreads. We empirically examine these predictions for a sample of large U.S. banks, exploiting recent mandatory disclosures of financial instruments designated as fair value level 1, 2, and 3, which indicate progressively more illiquid and opaque financial instruments. Consistent with predictions, results reveal that portfolios of level 3 financial assets have higher implied betas and lead to larger bid-ask spreads relative to those designated as level 1 or level 2 assets. Both results are consistent with a higher cost of capital for banks holding more opaque financial assets, as reflected by the level 3 fair value designation.
Notes: "July 2009"--Publisher's website.

Includes bibliographical references.