Segment information disclosure and trade credit

Abstract We examine the effect of mandatory segment disclosure on trade credit financing. Segment disclosure reduces the information advantage of suppliers relative to investors in evaluating firm default risk, reducing firms' reliance on trade credit. Exploiting the adoption of SFAS 131 as a shock to segment disclosure, we find that segment disclosure reduces reliance on trade credit among disclosing firms. This effect is stronger for firms with high ex‐ante default risk, poor information environments, and weak governance. Further analysis shows that segment disclosure reduces perceived default risk, eases financial constraints, increases stock liquidity, and facilitates the issuance of informationally sensitive securities.