Accounts Recevibale

Accounts Receivable Financing and Information Asymmetry

Hagit Levy Columbia School of Business Columbia University Email: hlevy11@gsb.columbia.edu

March, 2010

I would like to thank Charles Calomiris for his invaluable help. I would also like to thank Partha Mohanram, Nahum Melumad, Dan Cohen, Trevor Harris, Ohad Kadan, Ron Shalev, and participants of workshops at Columbia University and Washington University for helpful comments. All mistakes, however, are my own.

 

 

Accounts Receivable Financing and Information Asymmetry

ABSTRACT:

This study investigates the effect of information asymmetry between managers and outsiders on the use of accounts receivable in financing the firm’s operations. The information impounded in receivables pertains to the firm’s customers rather than the firm and therefore differs from the information embedded in other assets. The unique information content of accounts receivable makes it a likely candidate to use as a financing tool for highly information asymmetric firms. Consistent with the Pecking Order Theory, I find that the likelihood of using accounts receivable financing increases with the firm’s information asymmetry. I also find that the innate component of the firm’s earnings quality measure is more influential than the discretionary component in explaining the use of AR financing. This study further suggests an additional method of decomposing the earnings quality measure into its discretionary and innate components using proxies for the discretionary component of the information environment.

Keywords: Information asymmetry, capital structure, debt, receivables, financing

1   

  1. Introduction

 

Accounts receivable (hereafter, AR) are open accounts owed to the firm by trade customers. They are part of the firm’s working capital and constitute 14 percent of 2005 US industrial firms’ total assets, making them one of the largest asset groups on industrial firms’ balance sheet. AR serve as...