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

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