Examining the Relationship between Earnings Quality and Trade Credit

For investors and other stakeholder like creditors, earnings is very important. Trade credit has an important role in financing policy of a company. There are ways that creditors can protect themselves from loss; one of them is evaluating finance situation of their customers. The purpose of this study is to examine the relationship between earnings quality and trade credit. A sample of 88 listed companies in Tehran stock exchange between 2008 and 2013 formed this study. Accruals quality and volatility of earnings were used as proxies for earnings quality. We used the model developed by Dechow and Dichev (2002) to measure accruals quality. Earnings volatility was also measured according to Francis et al (2004). The findings of the study showed no relationship between earnings volatility and trade credit but indicated significant positive relationship between accruals quality and trade credit.