Does high audit quality mitigate a client firm's reliance on trade credit financing?

Using a large sample of publicly traded U.S. firms, we show that high audit quality is negatively related to a client firm's reliance on costly trade credit financing. Further analyses reveal that the relationship between audit quality and trade credit reliance is more pronounced for client firms showing higher information asymmetry, greater cash flow volatility, and lower collateral. We also identify two potential mechanisms through which audit quality diminishes a client firm's reliance on expensive trade credit financing: reduced cost of debt and enhanced access to equity market financing via stock liquidity. Additionally, the analysis shows that client firms with high audit quality tend to make faster payments on their trade credit agreements. Our findings indicate that audit quality can influence a client firm's trade credit policies.