Does Accounting Quality Matter for Short-term Financing? Evidence from Firms' Amount of Trade Credit

This paper examines the relation between a firm's amount of trade credit and its accounting quality. I use earnings smoothness, asymmetric timeliness of earnings, earnings management, and internal control weakness to proxy for accounting quality. Consistent with the theory that high accounting quality reduces information asymmetry between firms and stakeholders, I hypothesize and find evidence that firms with higher accounting quality are able to obtain more trade credit from their suppliers. Using a customer-supplier paired subsample, I show that the results are robust after controlling for suppliers' characteristics. Moreover, using the 2007-2008 financial crisis as an exogenous shock to credit supply, I hypothesize and find that the positive relation between trade credit and accounting quality is more pronounced during the period of credit tightening. Furthermore, I find that the characteristics of firms' products also impact the relation in such a way that the association is stronger when companies purchase services or differentiated goods. Finally, I show that the positive association is concentrated in small firms and firms without credit ratings on senior debt.