Investigation of the mediating role of real earnings smoothing in the relationship between financial distress and the use of trade credit

Abstract

Taking into account the premise of rational expectations and the necessity of allocative efficiency, financial resources are expected to flow in the direction that would create the most efficiency. Also, given the asymmetry of information and the ethical risk raised between the providers of financial information and its users, external users are expected to have the required and sufficient knowledge of the final product of the financial reporting process, i.e., audited financial statements, the quality of financial statements, and the possibility of biased reporting, and also to optimally use the information contained in it for their economic decisions. Financially distressed firms are naturally expected to lose the trust of suppliers, and suppliers are reluctant to grant trade credit to such firms. The statistical population of the present research consists of all the companies listed on the Tehran Stock Exchange that have submitted their financial statements during the period of 1390 to 1400 (2011 to 2021). The present research, therefore, can also be helpful for standard-setting institutions (auditing organizations) to develop standards concerning the conditions by considering the financial situation of companies such as financial distress as exceptional conditions that may distort the effective implementation of some accounting standards. They can also revise and make adjustments to the stricter accounting rules affecting earnings management, especially in situations where managers are under a lot of pressure.