Accounting‐Driven Losses and Trade Credit

ABSTRACT Prior research provides mixed evidence on the value relevance of reported losses. We contribute to this literature by examining whether accounting‐driven losses (i.e., intangibles‐driven losses or GAAP losses) provide incremental information to suppliers' decisions to grant trade credit or whether accounting‐driven losses determine these firms' use of trade credit as an alternative source of short‐term financing. Based on a sample of firms with and without accounting‐driven losses, our results indicate that firms reporting accounting‐driven losses have a higher level of trade credit than Real loss firms. This relationship is stronger when firms engage in real earnings management through reduced discretionary expenditures and when inventory liquidation costs are higher. These findings suggest that suppliers may interpret intangibles‐driven losses as signals of future growth potential rather than financial distress. Overall, our examination illuminates the value relevance of intangibles‐driven losses to firms' level of trade credit.