Effects of Business Group Affiliation on Trade Credit Finance: An Empirical Analysis of Public Firms in Korea

Abstract

This study examines how trade credit demand and supply are determined in Korea, where large business groups are dominant in most segments and hierarchies of many industries. Particularly, we investigate the effects of business group affiliation on the demand and supply of trade credit and find that a firm’s affiliation with a large business group has a positive effect on trade credit demand but a negative effect on trade credit supply. The results suggest that the extra bargaining power of large business groups enables group affiliates to supply less trade credit, but demand more. This study, which examines an extensive sample of Korean group affiliates, does not find strong evidence that trade credit finance functions as a tool for financial redistribution among group affiliates, as Deloof and Jegers (1999) did not either.

Keywords: Short-Term Debt Financing, Trade Credit, Business Group Affiliation, Financial Constraints, Bargaining Power

JEL Classification: G20, G30, G32