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Customer Firms’ Earnings Management Mechanisms and Their Suppliers’ Trade Credit

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Title:Customer Firms’ Earnings Management Mechanisms and Their Suppliers’ Trade Credit
Authors:Xing, Hanbing
Huangfu, Jiangbo
Thevenot, Maya
Keywords:trade credit
earnings management
supply chain
Date Issued:2021
Abstract:We investigate how customer firms use accrual and real activities earnings management to influence their suppliers’ trade credit decisions in the supply chain. We find that customer firms’ real activity earnings management is positively associated with the amount of supplier trade credit, while their accrual earnings management is negatively related. We further find that customer firms are more likely to manipulate discretionary production than discretionary non-operational expenses to affect supplier trade credit, and more importantly, that they are less likely to use discretionary R&D expenses for supplier trade credit. The results are robust to additional tests that address the effect of prior year’s earnings management on trade credit and the asymmetric market power relationships between customers and suppliers. Overall, our findings suggest that customer firms use real earnings management opportunistically to influence suppliers’ trade credit in the supply chain.
Appears in Collections: 11 Financial Accounting 5: Earnings management (FAR5)

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