Financial Statements' Credibility, Discretionary Accruals and the Cost of Debt : Tunisian Evidence

This study examines the effect of discretionary accruals and financial statements' credibility on the cost of debt in the Tunisian setting. The study draws upon a sample of 32 Tunisian companies for the period 2003-2012. Discretionary accruals are measured by the cross-sectional Jones model while financial statements' credibility is measured by the number of "except for" in audit reports. We provide evidence that only the number of exceptions issued by auditor in the audit report is positively associated with the cost debt. By contrast, discretionary accruals have no significant effect on the cost of debt. The results suggest that audit report content (number of "except for") is considered by creditors when pricing debt capital for private Tunisian firms. These findings may have policy implications for managers in the Tunisian setting since they alert them about the importance of increased financial statements' credibility in reducing the cost of debt.