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

I examine how the verification of financial statements influences lenders’ debt pricing decisions. To do so, I obtain access to 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 not only that audited firms have a significantly lower cost of debt, but also that lenders place significantly more weight on audited, compared to unaudited, 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.