| In this paper I examine whether accounting quality is associated with corporate liquidity management. The theory suggests that firms should substitute bank credit lines for cash holdings since holding cash incurs certain costs. I argue that this substitution depends on the firm's accounting quality. Good accounting quality facilitates debt contracting and helps firms access bank credit lines. As a result, firms with better accounting quality should be capable of obtaining more credit lines for their liquidity needs, while firms with worse accounting quality have to rely more on cash holdings. Empirically, I find that the portion of total liquidity needs provided by credit lines increases in accounting quality. I also find that this substitution is determined more by innate accruals quality, which is driven by the firm's business fundamentals, than by discretionary accruals quality, which is driven by managerial discretion in accounting. Overall, the findings suggest that poor accruals quality prohibits firms from accessing the debt market and causes firms to deviate from a better liquidity policy. |
