Earnings quality and trade credit in the Gulf Cooperation Council

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Abstract

The primary concern of credit providers is the timely payment of obligations by clients, as most clients tend to pay their obligations late. To obtain accurate information from their buyers, credit providers need to rely on financial reporting or other information channels. The purpose of this study is to investigate the impact of earnings quality on trade credit, with a focus on the moderating role of accounting information comparability. We used Refinitiv Eikon and Fitch Connect databases to measure the variables. The study utilized financial information from 250 companies listed on the Gulf Cooperation Council (GCC), and six countries’ stock exchanges between 2016 and 2021 with 1500 firm-year observations. Panel data regression models were used to test the research hypotheses. This study aims to answer if earnings quality has an impact on trade credit and if the impact of earnings quality on trade credit is greater in companies with higher comparability than in companies with lower comparability. The findings revealed that earnings quality has a positive impact on trade credit. Moreover, the results suggested that an increase in accounting information comparability intensifies the effect of earnings quality on trade credit. This paper has repercussions for policymakers, investors, and business organizations. Importantly, our study reveals how higher levels of earnings quality lead to better trade credit practices.

Keywords: Earnings Quality, Financing, Trade Credit, Comparability

Authors’ individual contribution: Conceptualization — A.A. and A.A.-M.; Methodology — A.A. and A.A.-M.; Validation —A.A.-M. and T.A.-A.; Formal Analysis — A.A. and A.A.-M.; Investigation — A.A. and Y.A.; Resources — A.A., A.A.-M., and T.A.-A.; Data Curation — A.A., A.A.-M., and Y.A.; Writing — Original Draft — A.A., A.A.-M., and Y.A.; Writing — Review & Editing — A.A., A.A.-M., T.A.-A., Y.A., and F.A.M.; Supervision — A.A. and Y.A.; Project Administration — A.A.-M., T.A.-A., Y.A., and F.A.M.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: D81, G30, G32, G34, G38, M40, M41, M48

Received: 12.03.2023
Accepted: 25.07.2023
Published online: 27.07.2023

How to cite this paper: AlHares, A., Al Mohannadi, A., Abu-Asi, T., AlBaker, Y., & Al Malki, F. (2023). Earnings quality and trade credit in the Gulf Cooperation Council. Journal of Governance & Regulation, 12(3), 128–138. https://doi.org/10.22495/jgrv12i3art14