Audit quality and corporate trade credit: evidence from the Asian emerging markets

Abstract

Purpose

The purpose of this study is to examine whether companies with high audit quality (AQ) are expected to use trade credit (TC) as a financing source. Traditionally, vendors are most likely to extend TC to creditworthy customers.

Design/methodology/approach

The author uses the data from 134,099 firm-year observations of nine Asian emerging markets from 2001 to 2017. Further, to check the impact of AQ on trade credit, the authors employ ordinary least square (OLS) with fixed effects, cluster effect regression and random effect.

Findings

The findings indicate that vendors extend more TC to the companies audited by the BIG4 auditors as, these independent practitioners have greater competencies, expert intellectual capital, global networking connections, and high investment in information technology. The authors, therefore, conjecture that the company's use of TC increases with their improved AQ, especially audited by BIG4. The results are found consistent with this prediction and robust to the alternative measures of trade credit. Similarly, this positive association is more pronounced with the BIG4 partner's unqualified audit opinion.

Research limitations/implications

This study uses the sample of Asian Emerging countries but the researchers cannot generalize the results to developed countries or other regions.

Practical implications

This paper's findings have significant implications for the management, board of directors, shareholders and suppliers. Further, results are in favor of appointing BIG4 auditors to gain the trust of suppliers.

Originality/value

Despite the wide-ranging literature that discusses the importance of quality audits in enhancing the firms' financial disclosures that leads to better access to finance through investors and lenders. But the TC as a financing source is ignored in relation to AQ. The study’s results extend the literature associating companies' AQ with financial decisions.

Citation

Saeed, A., Munir, Z. and Zafar, M.W. (2022), "Audit quality and corporate trade credit: evidence from the Asian emerging markets", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-06-2022-0903