Accrual Accounting and Access to External Funds: Evidence from Small Businesses

52 Pages Posted: 18 Aug 2018

See all articles by Kyonghee Kim

Kyonghee Kim

Michigan State University

Sukesh Patro

affiliation not provided to SSRN

Raynolde Pereira

University of Missouri at Columbia - School of Accountancy

Date Written: August 1, 2018

Abstract

This paper examines two related questions. First, does accrual accounting, in comparison to cash accounting, facilitate small businesses’ access to external funds? Second, does it also affect the nature of the firm’s borrowing relationships, i.e., arm’s length financing as opposed to relationship-based financing? These questions are prompted by theory that suggests information problems can lead to credit rationing, particularly for small businesses since they tend to be more opaque. We find a positive relation between a firm’s use of accrual accounting and its access to lines of credit and trade credit, two primary forms of external financing of small businesses. We find accrual accounting is positively associated with both the amount and terms of borrowing for these forms of financing. We also find accrual accounting facilitates a larger number of credit relationships and relationships with more distant financial institutions. Additionally, accrual accounting is associated with a shorter duration of borrowing relationships and lowered reliance on personal contact in communications with financial institutions. Overall, the evidence supports the argument that the use of accrual accounting can play a significant role in easing the credit constraints of small businesses and in facilitating greater use of arm’s length financing.

Keywords: Accrual Accounting, Trade Credit, Lines of Credit, Relationship-Based Financing

Suggested Citation

Kim, Kyonghee and Patro, Sukesh and Pereira, Raynolde, Accrual Accounting and Access to External Funds: Evidence from Small Businesses (August 1, 2018). Available at SSRN: https://ssrn.com/abstract=3233847

Kyonghee Kim (Contact Author)

Michigan State University ( email )

N206 North Business Complex
632 Bogue Street
East Lansing, MI 48824
United States
517-432-2920 (Phone)

Sukesh Patro

affiliation not provided to SSRN

Raynolde Pereira

University of Missouri at Columbia - School of Accountancy ( email )

337 Cornell Hall
Columbia, MO 65211
United States
573-882-6253 (Phone)

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