Trade credit behavior of Korean small and medium sized enterprises during the 1997 financial crisis

Abstract

This paper investigates the effect of the 1997 Korean financial crisis on the trade credit behavior of Korean small and medium sized enterprises (SMEs) using a unique panel dataset for the period 1994 to 1999. I uncover new evidence supporting the substitution and redistribution hypotheses, which contradicts earlier studies. Specifically, the results show that liquid SMEs provided more trade credit to their client firms during the credit contraction, while financially constrained SMEs received more trade credit from their suppliers. Further, I find evidence that SMEs in financially distressed regions relied more on trade credit than their counterparts in financially healthier regions.