This paper investigates Korean business group-affiliated firms’ trade credit behaviors during the 1997 financial crisis period. These behaviors are heterogeneous and depend on their firmlevel and group-level financial conditions, as well as whether the counterparties of transactions are affiliated with them. During the credit crunch (1998–2000), business groups exploit trade credit as an alternative source of intra-group fund allocation to redistribute liquidity from liquid affiliates to constrained affiliates. To be specific, cash-rich firms provide more trade credit to their financially constrained affiliates, while they receive less trade credit from their affiliates and more trade credit from unaffiliated firms. Furthermore, firms affiliated with chaebols, which were under group-wide financial restrictions due to chaebol reforms, show different trade credit behavior from others. For instance, highly leveraged chaebol firms receive more trade credit from suppliers unaffiliated with them, while cash-rich chaebol firms extend less trade credit to unaffiliated clients.

Key words: Trade credit; Bank credit; Group affiliation; Chaebols; Korean financial crisis

JEL classification: G01; G30; G32