Financial Reporting Quality and Private Firms’ Access to Trade Credit Capital

The research problemWe examine the association between financial reporting quality and trade credit capital for a large sample of European private firms. Furthermore, we explore how information asymmetry and credit rationing moderate the link between financial reporting quality and trade credit financing.MotivationTrade credit constitutes one of the most important sources of financing for private firms. Nevertheless, prior research has provided few and inconclusive evidence of the link between financial reporting quality and private firms’ trade credit capital. Our study is further motivated by the recent calls for more research on the determinants of the relation between financial reporting quality and trade credit financing (e.g., Hope & Vyas (2017)).The test hypothesesH1: There is a positive association between financial reporting quality and private firms’ access to trade credit capital.H2a: The relation between financial reporting quality and private firms’ access to trade credit capital is more positive when information asymmetry and uncertainty about future cash flows are high.H2b: The relation between financial reporting quality and private firms’ access to trade credit capital is more positive when credit is rationed.Target populationPolicymakers who seek to improve accounting standards and customize them to the financial reporting needs of private firms and their stakeholders (e.g., international financial reporting standards for small and medium-sized enterprises), private firm managers, and private firm suppliers.Adopted methodologyOrdinary Least Squares regression analyses.AnalysesWe examine the association between financial reporting quality and trade credit financing for a large sample of private firms from Europe’s five largest economies, i.e., France, Germany, Italy, Spain, and the United Kingdom. Our sample period spans from 2010 to 2016. We use the Amadeus database as our source of data. We regress trade credit capital on three proxies for financial reporting quality. In cross-sectional analyses, we repeat our main estimations by interacting our proxies for financial reporting quality with proxies for information asymmetry and credit rationing.FindingsWe find strong evidence that high-quality financial reporting is associated with more trade credit financing in private firms. We further show that the positive relation between high-quality financial reporting and trade credit is stronger when information asymmetry and uncertainty about future cash flows is high as well as when credit is rationed. These findings suggest that suppliers complement insider communication channels and financial reporting quality and provide a more nuanced understanding of the interplay among information asymmetry, credit rationing, and trade credit financing.