Financial Reporting and Trade Credit: Evidence from Mandatory IFRS Adoption

Abstract

We investigate the effect of mandatory international financial reporting standards (IFRS) adoption on trade credit. We document that firms in countries that adopt IFRS receive more trade credit from their suppliers, consistent with improved financial reporting quality and comparability playing a role in facilitating informal financing. This increase is larger for countries with a low level of societal trust, a poor pre-IFRS-adoption information environment, and stronger legal enforcement. These cross-sectional results suggest that the conditions under which higher quality information is made publicly available affect suppliers’ decisions to provide trade credit. This increase is also larger for firms with greater exposure to foreign markets, a finding that highlights the importance of more comparable international financial reporting standards in facilitating cross-country trade credit. We also find that IFRS adoption has a stronger positive effect on trade credit for firms with greater liquidity needs. Finally, we find that firms in countries that adopt IFRS also extend more trade credit to their customers. Overall, our results support the notion that financial reporting can have a causal effect on trade credit.

Keywords: Trade credit; Financial reporting; Information risk

JEL Classification: M40, M41, G15, G32, G38