Sink or swim? Managerial ability and trade credit

Abstract

In this article, we examine the relation between managerial ability and the use of supplier-provided trade credit. The literature documents the positive effects of high-ability managers, including more accurate earnings forecasts, improved earnings quality, and overall improvement in corporate disclosure policies. We argue that customers (those seeking trade credit) with high-ability managers are better able to negotiate with suppliers, provide more transparent disclosure, and maintain strong relationships. Likewise, suppliers are willing to provide more trade credit to customers with high-ability managers because of reduced information asymmetry, creating an environment of trust and transparency. Our empirical results show that suppliers extend more trade credit to customers with high-ability managers and that this relation is more pronounced for financially constrained firms.