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The role of accounting quality in corporate liquidity management

Wulung Li

Accounting and Finance, 2021, vol. 61, issue 2, 2631-2670

Abstract: This paper studies the role of accounting quality in accessing credit lines for liquidity purposes. While the literature suggests that firms should meet liquidity needs through credit lines and not cash holdings, some firms rely on cash instead because of limited access to credit markets. I find low accruals quality firms use less credit lines and hold more cash. This relationship is more pronounced when firms are financially distressed, when credit markets are tightening, and during the 2007–2008 financial crisis. The spread and the use of cash flow covenants in credit lines are two channels through which accruals quality affects liquidity choice.

Date: 2021
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