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I examine how the verification of financial statements influences lenders' debt pricing decisions. To do so, the author obtains 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. The author finds 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, the author provides evidence of a mechanism for this increased financial statement usefulness: accruals from audited financial statements are better predictors of future cash flows.
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