Voluntary Disclosure and Trade Credit—Evidence from Management Earnings Forecasts

• In Event: Earnings Management and Forecasts and Operating Decisions

Abstract

We examine the association between management earnings forecasts and trade credit. While suppliers may be more willing to grant trade credit to customers with forecasts given the incremental information, these customers may also have easier access to other financing sources, decreasing trade credit demand. Using a sample of U.S. listed firms from 2003 to 2019, we find that firms issuing management earnings forecasts exhibit a lower level of trade credit. This lower level of trade credit is also observed in firms with more accurate forecasts. We address selection bias and endogeneity concerns by conducting the Heckman two-step method, controlling for firm-level fixed effects, and employing a two-stage instrumental variable approach. Our results are robust to these tests and alternative measures of the main variables. Additional analysis reveals that the negative relation between forecast issuance (accuracy) and trade credit is mitigated when firms have a high cost of capital. Our findings highlight the importance of firms’ voluntary disclosures, such as management earnings forecasts, for their external financing choices.

Authors

• Xiaoxiao Song, Southern Illinois University Edwardsville

• Yuan Shi, Penn State University - Great Valley

• Hongkang Xu, University of Massachusetts-Dartmouth