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


  • This paper is based on my dissertation completed at the University of Michigan. I thank my dissertation committee, Russell Lundholm (Chair), Amy Dittmar, Yusufcan Masatlioglu, Greg Miller, and Venky Nagar, for their insightful comments and guidance. I am also very appreciative of the comments provided by Ray Ball, Mary Barth, Anne Beatty, Phil Berger (Editor), Gavin Cassar (Discussant), Raffi Indjejikian, Michal Matejka, Bill Mayew, Madhav Rajan, Cathy Shakespeare, Nemit Shroff, Hal White, Teri Yohn, Gwen Yu, Frank Zhang, an anonymous referee, the PhD. students at the University of Michigan, workshop participants at Dartmouth College, Harvard Business School, Indiana University, Ohio State University, Stanford University, University of Chicago, University of Illinois, University of Michigan, and University of Utah, and conference participants at the 2010 Journal of Accounting Research conference and the 2010 American Accounting Association Meeting for many helpful suggestions. I am very grateful to Sageworks, Inc. for providing me with its data. Finally, I appreciate the many conversations regarding institutional details with the AICPA, Indiana CPA Society, Mike Farmer, Gene Fitzgerald, and William Minnis. Financial support from the Paton Accounting Fellowship is gratefully acknowledged. All errors are my own.


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.