Accounting Quality and Access to Credit Lines

Abstract

We examine the relationship between accounting quality and the firms’ use of credit lines for short-term liquidity management. Based on the corporate finance literature on liquidity management, we argue that firms who meet their liquidity needs through cash holdings and not credit lines are likely to do so because of their inability to access the credit market. In particular, we argue that poor accruals quality is likely to make it difficult for firms to access credit lines. We find that firms with poor accruals quality use less credit line to meet their liquidity needs. We also find that firms with poor accruals quality have higher credit line spreads. We also use Richardson et al. (2005) model that compares the accruals persistence with that of cash flows and find that firms that have more credit lines have higher persistence of current operating asset accruals, net non-current operating asset accruals and net financial asset accruals. Overall, the findings suggest that high accruals quality facilitates firms’ access to the debt markets.