Trade Credit, Group Affiliation, and Credit Contraction: Evidence from the 1997 Korean Financial Crisis

Abstract

This paper uses unique trade credit information to investigate how the 1997 financial crisis shocks affect trade credit behavior in Korea during the crisis and the subsequent financial and corporate reform period. I uncover evidence that cash-rich chaebol firms increased the amount of trade credit provided to clients affiliated with them, while liquid chaebol firms also received more trade credit from non-affiliated suppliers to redistribute the liquidity to their constrained affiliates. In addition, constrained chaebol-affiliated firms resorted to trade credit extended by suppliers, irrespective of their affiliation. Non-chaebol firms with large cash holdings provided more liquidity to clients affiliated with them, while constrained non-chaebols only received more trade credit from suppliers affiliated with them. The results suggest that trade credit played a crucial role in the internal capital markets of chaebols during the credit crunch and that constrained non-chaebol firms experienced the most severe credit contractions.