The Information Content of Commercial Banks’ Fair Value Disclosures of Loans Under SFAS No. 107

Statement of Financial Accounting Standards No. 107 (codified in ASC 825-10), Disclosures about Fair Value of Financial Instruments, mandates the disclosure of fair values for financial instruments with the objective of providing investors with more relevant information about firms' future cash flows. However, the results show that fair value measurements of loans explained variation in future loan losses, which capture cash flows from loans, less than traditional cost-based measurements of loans. In addition, I find evidence suggesting that financially distressed banks overstated the fair values of their loan portfolios and that fair values of loans in the aggregate lagged considerably behind the market values of loans during the recent credit crisis. Overall, my results suggest that fair value disclosures in bank loan portfolios contain relatively less information about future cash flows because they are measured unreliably and they suffer from a similar lack of timeliness as reported carrying values