Financial Reporting and Trade Credit:Evidence from Mandatory IFRS Adoption*
Xiao Li
School of Accountancy, Central University of Finance and Economics
afxiaoli@cufe.edu.cn
Jeffrey Ng†
School of Accounting and Finance, The Hong Kong Polytechnic University
tee-yong-jeffrey.ng@polyu.edu.hk
Walid Saffar
School of Accounting and Finance, The Hong Kong Polytechnic University
walid.saffar@polyu.edu.hk
Abstract
We investigate the effect of mandatory IFRS adoption on trade credit. We
document that firms in countries that adopt IFRS receive more trade credit
from their suppliers, consistent with improved financial reporting quality and
comparability playing a role in facilitating informal financing. This increase is
larger for countries with a low level of societal trust, a poor pre-IFRS-adoption
information environment, and stronger legal enforcement. These crosssectional
results suggest that the conditions under which higher quality
information is made publicly available affect suppliers’ decisions to provide
trade credit. This increase is also larger for firms with greater exposure to
foreign markets, a finding that highlights the importance of more comparable
international financial reporting standards in facilitating cross-country trade
credit. We also find that IFRS adoption has a stronger positive effect on trade
credit for firms with greater liquidity needs. Finally, we find that firms in
countries that adopt IFRS also extend more trade credit to their customers.
Overall, our results support the notion that financial reporting can have a causal
effect on trade credit.
Keywords:*
Xiao Li
School of Accountancy, Central University of Finance and Economics
afxiaoli@cufe.edu.cn
Jeffrey Ng†
School of Accounting and Finance, The Hong Kong Polytechnic University
tee-yong-jeffrey.ng@polyu.edu.hk
Walid Saffar
School of Accounting and Finance, The Hong Kong Polytechnic University
walid.saffar@polyu.edu.hk
CAR

Abstract
We investigate the effect of mandatory IFRS adoption on trade credit. We
document that firms in countries that adopt IFRS receive more trade credit
from their suppliers, consistent with improved financial reporting quality and
comparability playing a role in facilitating informal financing. This increase is
larger for countries with a low level of societal trust, a poor pre-IFRS-adoption
information environment, and stronger legal enforcement. These crosssectional
results suggest that the conditions under which higher quality
information is made publicly available affect suppliers’ decisions to provide
trade credit. This increase is also larger for firms with greater exposure to
foreign markets, a finding that highlights the importance of more comparable
international financial reporting standards in facilitating cross-country trade
credit. We also find that IFRS adoption has a stronger positive effect on trade
credit for firms with greater liquidity needs. Finally, we find that firms in
countries that adopt IFRS also extend more trade credit to their customers.
Overall, our results support the notion that financial reporting can have a causal
effect on trade credit.