The effect of trade credit on firm performance: Evidence from Korean firms during the Global Financial Crisis

This paper empirically investigates the effects of two primary types of debt financing - bank credit and trade credit - on firm sales performance during the Global Financial Crisis using Korean firm-level data. I find that firms who relied more on bank credit tended to have slower sales growth, whereas those relied more on trade credit performed better during the crisis and afterwards. However, the mitigating effect of trade credit did not exist for exporters. Also, there was evidence of heterogeneous effect of trade credit among non-exporters, depending on firms' degree of financial access; the effect of trade credit during the crisis significantly diminished for firms with better financial access. The findings overall indicate that for domestic firms with limited financial access trade credit was a more stable type of financing than bank credit, limiting the deteriorating effect of financing on firm performance.

Automated summary

This paper empirically investigates the effects of two primary types of debt financing, bank credit and trade credit, on firm sales performance during the Global Financial Crisis using Korean firm-level data. The findings indicate that firms relying more on bank credit experienced slower sales growth, while those relying more on trade credit performed better. However, the mitigating effect of trade credit was not observed for exporters. There was also evidence of a heterogeneous effect of trade credit among non-exporters, depending on firms' degree of financial access.