Does Fair value matter for lenders? A discussion for the case of Italy

This paper discusses the usefulness of incorporating fair values as measures of assets and liabilities in the body of financial statements in credit-oriented financing systems. Specifically, we argue that fair valuation – while potentially useful in countries that boast advanced capital markets with diffused equity ownership – is not as useful, and even potentially misleading, in countries wherein lenders are the major source of financing and hence are the ‘primary users’ of financial reporting. This paper contributes to the discussion by reviewing the literature on the prediction of default, bankruptcy, credit-rating, and the pricing of credit and identifying the informational inputs used for such predictions and pricing. We then argue that these informational inputs largely ignore fair values, whether measured as exit values or otherwise. Next, we suggest that the premise that fair values are suitable for all countries and entities, regardless of differences in ownership structure and modes of financing, may need to be re-examined. We do propose, however, that enhanced disclosures of fair values are likely to satisfy the criterion of decision usefulness in Italy and other similarly situated countries.