Trade Credit and Earnings Quality: Financial Reporting Credibility as a Determinant of Supplier Financing

Trade credit is traditionally explained as a response to financial constraints, information asymmetry, and relational contracting. However, less attention has been devoted to how the quality of financial reporting influences supplier credit decisions. This paper develops a conceptual framework linking earnings quality to trade credit availability and terms. Building on foundational theories of informational advantage and credit substitution, the analysis argues that suppliers rely not only on private transactional information but also on publicly observable accounting signals when determining credit extension. High earnings quality reduces uncertainty, enhances credibility, and facilitates more favorable credit terms, whereas low reporting quality increases monitoring costs and tightens supplier financing. Integrating insights from trade credit theory and accounting research—including recent evidence that suppliers differentiate between accounting-driven and real economic losses—the paper positions financial reporting credibility as a central determinant of trade credit dynamics. The framework offers testable implications using publicly available accounting measures and opens new avenues for empirical research at the intersection of accounting and corporate finance.