Study On The Relationship Between Accounting Conservatism And Cost Of Trade Credit Financing In Product Market Competition

Based on mutual understanding and trust among companies, trade credit financing is being used more broadly as one of the most important financing channels. In recent years, companies effected by credit constraints are switching to trade credit financing, which promotes the use of trade credit. Accounting conservatism is an accounting convention, giving economic consequences on the financial side. It could be an important economic consequence whether the trust relationship could be set up and lower cost of trade credit financing being provided, with suppliers being the demand side of accounting information.As a significant strategic factor, product market competition might have an influence over accounting conservatism, as well as trade credit financing. Except for studying the relationship between accounting conservatism and cost of trade credit financing, this paper links the cause of accounting conservatism with its economic consequence, exploring whether the cost of trade credit financing could be reduced by showing more conservatism in consideration of market competition.Using the data of Chinese A-share listed companies during the period of 2003-2011 as sample, we carry on this study focusing on the affection mechanism over the product market competition, accounting conservatism and cost of trade credit financing. The results show that:Product market competition contributes to company's demand for accounting conservatism. Accounting conservatism could bring the economic consequence of lower cost of trade, especially for the industries under high degree of competition. We further find that the product market competition could influence the relationship between accounting conservatism and cost of trade credit financing, and both industries of low-level and medium-high level competition show more reliance on the information conduction by accounting conservatism in obtaining lower-cost trade credit financing under the fierce competition. Based on the study results, recommendations are made over the issue of low cost of trade credit financing acquisition considering competition environment.