The Effect of Business Group Affiliation on Trade Credit Financing: An Empirical Analysis of Public Firms in Korea
45 Pages Posted: 2 Jul 2020 Last revised: 19 Nov 2020
Date Written: July 25, 2020
This paper examines how trade credit demand and supply are determined in Korea, where large business groups are dominant in most of the segments and hierarchies of many industries. In particular, we investigate the effects of business group affiliation on trade credit financing, finding 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 provide substantially less trade credits but to demand more when they face financial constraints. However, we do not find evidence that trade credit financing functions as an instrument to subsidize member firms through the internal capital markets within a business group. These findings explain the effects of business group affiliation on trade credit demand and supply in short-term debt markets from the perspective of the unique characteristics of the Korean economy.
Keywords: Short-Term Debt Financing, Trade Credit, Business Group Affiliation, Financial Constraints, Bargaining Power
JEL Classification: G20, G30, G32
Suggested Citation: Suggested Citation