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

We examine whether more sophisticated accounting methods (in the form of accrual accounting) interact with other information sources to reduce information asymmetries between small business borrowers and lenders, thereby lowering borrowers‫׳‬ probability of loan denial and cost of debt. We find that higher third party credit scores, but not the use of accrual accounting, decrease the likelihood of loan denial. However, firms using accrual accounting exhibit statistically lower interest rates after controlling for many factors associated with the cost of debt. Further, the interest rate benefits from accrual accounting are greatest when the borrower‫׳‬s credit score is low and/or the length of its banking relationship with the lender is short. This evidence indicates that accrual accounting can benefit small business borrowers, but that the information contained in third-party credit scores and obtained through ongoing banking relationships can substitute for the incremental information provided by accrual accounting.

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“…when examining smaller, private firms (Cassar, 2010) and can result in significant noise in an inferred cost of debt measure.…”

Section: Accrual Accounting Usementioning

confidence: 99%

Alternative Information Sources and Information Asymmetry Reduction: Evidence from Small Business Debt

2010

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“…Assuming this information role, auditors can help to reduce financing costs. Cassar (2011) argues that users generally consider that audited financial statements are more credible and reliable than non-audited financial statements.…”

Section: Introductionmentioning

confidence: 99%

“…The auditing process helps to ensure the reliability and integrity of financial statements, improving the quality of financial information (Cassar, 2011;Dedman & Kausar, 2012). Assuming this information role, auditors can help to reduce financing costs.…”

Section: Introductionmentioning

confidence: 99%

Cost of debt capital and audit in Spanish SMEs

Huguet

Cabedo

2014

Spanish Journal of Finance and Accounting / Revista Española de

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Evidence about the effect of voluntary audits on the cost of debt is mixed, and there is no research about the effects of mandatory audits and the non-compliance with the audit requirement. Using a sample of Spanish SMEs, where some companies are exempt from audit and some are mandatorily audited, we examine if audits, either mandatory or voluntary, help to reduce the cost of debt. We do not find a significant association between voluntary audits and cost of debt, whereas companies that breach the audit requirement have a higher cost of debt than the mandatorily audited ones. This suggests that differences in the cost of debt between audited and unaudited companies are associated with a "punishment" for companies that shun the mandatory audit rather than a "reward" for voluntarily audited companies. Moreover, within audited SMEs, we do not find that those audited by large auditors have a lower cost of debt.La evidencia sobre la relación entre el coste financiero y la auditoría voluntaria es mixta, y no existe literatura empírica sobre los efectos del no cumplimiento con la auditoría obligatoria. Con una muestra de pymes españolas, una parte de las cuales está obligada a auditarse y otra está exenta, examinamos si la auditoría, tanto obligatoria como voluntaria, ayuda a la reducción del coste financiero. No encontramos una relación significativa entre la auditoría voluntaria y el coste financiero, mientras que las pymes que incumplen con el requisito de auditarse tienen un coste financiero mayor que las auditadas obligatoriamente. Ello sugiere que las diferencias en el coste financiero entre pymes auditadas y sin auditar están asociadas a un "castigo" para aquellas que evitan la auditoría obligatoria, en lugar de a una "recompensa" para las auditadas de modo voluntario. Entre las pymes auditadas, no encontramos que las auditadas por grandes auditores tengan un menor coste financiero.

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“…Since this variable is not directly observable, we estimate a proxy, which is calculated as the ratio between the interest paid and the average financing debt between the beginning and the end of the year. We are aware that, although this variable is commonly used as a proxy for the cost of debt, it involves several limitations (Cassar, 2011;Huguet & Gand ıa, 2014). First, the variable is a noisy measure of the cost of debt because it considers the average level of debt rather than the specific loans.…”

Section: Methodsmentioning

confidence: 99%

“…We eliminate outliers at percentiles 5-95 in order to mitigate this limitation (Huguet & Gand ıa, 2014;Vander Bauwhede, De Meyere, & Van Cauwenberge, 2015). A second limitation is related with the 'staleness' of the variable, in the sense that a portion of the observed interest rate is due to contracts from previous years (Cassar, 2011). The inclusion of the same variable lagged one period as a control variable can Model [1a] includes VOL, a dummy which equals 1 when a company is below SAT and thus a priori voluntarily audited, and 0 for mandatory audits, and tests whether the cost of debt is different depending on whether audits are voluntary or mandatory, i.e.…”

Section: Methodsmentioning

confidence: 99%

Audit fees and cost of debt: differences in the credibility of voluntary and mandatory audits

Cabedo

Huguet

2019

Economic Research-Ekonomska Istraživanja

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Despite the extensive research on audit fees, few studies have examined the effect of audit fees on the cost of debt. Based on the credence goods theory, we examine whether the effect of audits on the cost of debt is affected by the type of audit (voluntary or mandatory) and the audit fees, as well as whether there is a combined effect of voluntary audits and audit fees, so that the effect of voluntary audits on the cost of debt is affected by audit fees. Using a sample of Spanish SMEs, we find an asymmetric effect of audit fees on the cost of debt: higher audit fees are associated with a lower cost of debt for voluntarily audited companies, while the association is not significant for mandatory audits. Results suggest that, although the type of audit and the audit fees do not have a direct effect on the credibility of audits, the combination of both factors has relevance for lenders, so that higher audit fees in the voluntary setting are positively valued by them. The study contributes to the literature on auditing by showing that voluntary audits are relevant for capital providers as long as audits are perceived of quality.

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

Cited by 33 publications

References 52 publications

Alternative Information Sources and Information Asymmetry Reduction: Evidence from Small Business Debt

Alternative Information Sources and Information Asymmetry Reduction: Evidence from Small Business Debt

Cost of debt capital and audit in Spanish SMEs

Audit fees and cost of debt: differences in the credibility of voluntary and mandatory audits

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