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The author examines the aggregate economic consequences of financial reporting quality (via its relation to the level of information asymmetry between firms and providers of capital). Economic theory argues that problems due to information asymmetry between borrowers and lenders in the credit markets can have economy-wide consequences by magnifying and prolonging the negative effects of an economic downturn. The literature refers to this effect of information asymmetry as the financial accelerator effect and argues that this effect contributes to the magnitudes of a business cycle and is an important source of a financial crisis.
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