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

Abstract

Prior research suggests that suppliers are able to fund opaque and credit-rationed customers because they rely heavily on insider communication channels to resolve information asymmetry. In this paper we 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. We find strong evidence that high quality financial reporting is associated with more trade credit financing and that this relation is stronger when information asymmetry and uncertainty about future cash flows is high, as well as when credit is rationed. Our 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.