Trade credit, group affiliation, and credit contraction: Evidence from the 1997 Korean financial crisis

The literature shows that, during a credit crunch, liquid firms provide more trade credit to their client firms. However, the literature neglects the possibility that a firm may be affiliated with a business group. A group-affiliated firm may make different trade credit provision decisions based on whether its clients are affiliated with them, especially during a credit crunch. Thus, to fill the gap, this study investigates the trade credit behaviors of Korean firms affiliated with business groups during the 1997 Korean financial crisis. I find evidence that group-affiliated firms with high liquidity increase trade credit provision only to their affiliates, while they decrease financial assistance to unaffiliated client firms. Financially distressed firms receive less trade credit from unaffiliated suppliers. These findings suggest that business groups tend to exploit trade credit as an emergency liquidity source within intra-group liquidity markets during the financial crisis.