Accounts Receivable Financing and Information Asymmetry

Abstract

This study provides evidence that firms exploit the unique information characteristics of the balance sheet asset accounts receivable (AR) to mitigate information asymmetry when raising debt. Information on AR pertains to the firm’s customers, thereby reducing the informational advantage borrowers have over outsiders concerning this asset’s value, relative to the firm’s other assets. I find that the likelihood of using different forms of AR backed debt increases with multiple measures of firm’s information asymmetry after controlling for its credit risk profile. These results hold when analyzing a subset of firms using a specific form of AR backed debt – securitization – against a sample matched on credit risk profile. Finally, I provide evidence that the firm’s customers’ information asymmetry mitigates the effect of borrowers’ information asymmetry on the likelihood of using AR to back debt.