Sink or swim? Managerial ability and trade credit

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.