The Value of Financial Statement Verification in Debt Financing: Evidence from Private U.S. Firms

Michael Minnis

Journal of Accounting Research, 2011, vol. 49, issue 2, 457-506

Abstract: I examine how verification of financial statements influences debt pricing. I use a large proprietary database of privately held U.S. firms, an important business sector in which the information environment is opaque and financial statement audits are not mandated. I find that audited firms have a significantly lower cost of debt and that lenders place more weight on audited financial information in setting the interest rate. Further, I provide evidence of a mechanism for this increased financial statement usefulness: accruals from audited financial statements are better predictors of future cash flows. Collectively, I provide novel evidence that audited financial statements are more informative and that this significantly influences lenders’ decisions.

Date: 2011
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https://doi.org/10.1111/j.1475-679X.2011.00411.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:joares:v:49:y:2011:i:2:p:457-506

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Journal of Accounting Research is currently edited by Philip G. Berger, Luzi Hail, Christian Leuz, Haresh Sapra, Douglas J. Skinner, Rodrigo Verdi and Regina Wittenberg Moerman

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