The effect of affiliation with a large business group on trade credit finance: An empirical analysis of chaebol firms in Korea

Abstract

AbstractWe investigate the effect of affiliation with a large business group on a firm's trade credit policy while controlling for the effects of its financial health and bargaining power in the Korean setting. Group affiliation may influence trade credit finance through the internal capital market mechanism and/or the extra bargaining power mechanism. In our empirical analyses, we focus on identifying the more dominant mechanism for determining trade credit demand (TCD) and supply (TCS). First, we provide a set of empirical findings showing that a firm's affiliation with a large business group increases the firm's TCD but decreases its TCS. These findings support the extra bargaining power mechanism argument. Second, we provide another set of empirical findings that group‐wise financial distress has weak positive impacts on a group affiliate's TCD and TCS. These findings support the internal capital market mechanism argument. Overall, we provide evidence that large business groups in Korea function uniquely in that the extra bargaining power mechanism greatly dominates the internal capital market mechanism when determining a group affiliate's trade credit transactions. We also provide evidence of the internal capital market mechanism functioning when an entire business group faces severe financial difficulties.