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Internal control effectiveness and trade credit

Author

Listed:
  • Mai Dao

    (The University of Toledo)

  • Trung Pham

    (University of Illinois Springfield)

  • Hongkang Xu

    (University of Massachusetts Dartmouth)

Abstract

In this study, we investigate whether trade credit is associated with internal control effectiveness. Using a sample of U.S. publicly listed firms over the period 2006–2018, we find strong and robust evidence that internal control effectiveness firms have a lower level of trade credit. Our additional analyses show that the cost of equity capital moderates the relation between internal control effectiveness and trade credit. We also find evidence that internal control effectiveness firms make quicker payments for their trade credit contracts than other firms. In addition, we find that firms have a higher demand for trade credit when the firms have ineffective internal controls, disclose entity level internal control material weaknesses, and report internal control ineffectiveness related to trade credit accounts. Taken together, these findings suggest that internal control effectiveness plays an important role in trade credit-a special form of firms’ short-term financing source.

Suggested Citation

  • Mai Dao & Trung Pham & Hongkang Xu, 2022. "Internal control effectiveness and trade credit," Review of Quantitative Finance and Accounting, Springer, vol. 59(4), pages 1423-1452, November.
    • Handle: RePEc:kap:rqfnac:v:59:y:2022:i:4:d:10.1007_s11156-022-01079-3
    DOI: 10.1007/s11156-022-01079-3
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    More about this item

    Keywords

    Internal control effectiveness; Internal control weaknesses; Trade credit; Supplier financing;
    All these keywords.

    JEL classification:

    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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