Quality of financial information and trade credit: an analysis of medium-sized retail companies in Portugal

This study examines how the quality of financial information (QFI), using financial reporting discretion, influences trade credit decisions for Portuguese medium-sized retail companies, particularly in contexts of bank financing constraints (2012 to 2022). Findings indicate that isuppliers respond more to optimistic financial signals—specifically, income-increasing discretionary accruals—than to intrinsic accounting quality. Instead of relying purely on formal data, suppliers prioritize relational and operational factors, such as trust, interpersonal relationships, debt history, payment terms and operational profitability. Additionally, company size, asset tangibility and profitability negatively influence trade credit. Firms with low asset tangibility tend to utilize trade credit more frequently because they lack sufficient collateral to secure bank financing. As tangibility increases, these firms may access bank credit at lower costs and consequently substitute trade credit. A similar pattern is observed for firm size, with smaller firms relying more heavily on supplier credit, whereas larger firms display lower dependence on this financing channel. Moreover, greater availability of internal resources reduces the need for supplier-based financing. Our results contradict part of the existing literature, which predicts positive relationships between trade credit, firm size, tangibility and profitability. The study highlights the importance of fostering trust between companies and suppliers, as well as enhancing financial transparency to secure more favorable financing conditions.