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

Journal of Accounting Research, Forthcoming

Chicago Booth Accounting Research Paper

62 Pages Posted: 1 Feb 2011  

Michael Minnis

University of Chicago - Booth School of Business

Date Written: January 31, 2011

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.

Keywords: Verification, Auditing, Debt Financing, Private Firms, Earnings Persistence

JEL Classification: D82, G20, L14, M42

Suggested Citation

Minnis, Michael, The Value of Verification in Debt Financing: Evidence from Private U.S. Firms (January 31, 2011). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1752278

Michael Minnis (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

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