The issues of financing and adequate access to internal and external sources are essential parts of operating any businesses. In this regard, adequate access to debt financing, particularly bank financing, is a crucial factor in maintaining the firm as a going concern and also keeping its potential for growth. However, in reality, firms have unequal or uneven access to capital markets and, consequently, both internal and external funds do not provide perfect substitutes or alternatives for factors such as agency conflicts, tax avoidance, costs of financial distress and information asymmetry. Given the circumstances, it is expected that small- and even medium-sized businesses encounter some difficulties in obtaining loans and other bank services at affordable rates and fair terms, particularly in the wake of corporate collapses like Enron, WorldCom and HIH Insurance Group in Australia in the early 2000s. In the present study, we attempt to establish a linkage between two rarely researched areas, i.e. earnings quality (hereafter, EQ) and managerial access to internal and external (bank) financing, where EQ is measured by employing seven different proxies which are developed by recent empirical studies (e.g. Myers et al., 2003; Schipper and Vincent, 2003; Dechow et al., 2010). Our motivation stems from the fact that a firm with limited or no access to external financing may be seriously unable to pursue an optimal investment policy and consequently loses its growth opportunities. This phenomenon is more pronounced in capital markets of developing countries where small- and medium-sized quoted firms are generally more financially constrained compared to their relatively large and unconstrained counterparts in the developed capital markets. Therefore, we aim to test this relationship in the Tehran Stock Exchange (TSE) as a typical example of developing capital markets with more variations in the degree of access to external capital markets. To our knowledge, to date, few studies have empirically examined the relationship between corporate debt financing and the quality of earnings. Pope (2003), for instance, argues that establishing a balance between corporate debt and equity financing brings about an increase in demands for accounting information, which per se explains the differences in financial disclosure patterns. Ghosh and Moon (2010) also suggest that firms with higher reliance on debt financing are more likely to incur higher costs of borrowing from lower EQ, primarily owing to the fact that the benefits from avoiding potential debt covenant violations exceed the higher borrowing costs.