The main reasons for the difference between the book value of bad loans and the price that specialized market operators are willing to pay lie in the different criteria used in the financial statement and by investors to calculate their value.
This paper demonstrates that these different criteria can account for the entire gap between the book value of bad loans and the price offered by an investor and that the gap is proportionate to the length of recovery procedures (judicial and extra-judicial). In other words, recovery times play a key role in the valuation of these assets.
