Trade credit and firm value in business groups: evidence from Korea

ABSTRACT

This study examines the relation between trade credit and firm value in the context of business groups (i.e. chaebols). We find that the use of accounts receivable negatively influences firm value, and this negative impact is more pronounced for group-affiliated firms than for stand-alone firms. We further find that the negative moderating role of business groups on trade credit-firm value nexus is stronger for firms with lower product market competition, lower large shareholder ownership, higher cash holdings, and higher financial distress. Our main findings are robust to an endogeneity concern, an alternative proxy for trade credit, and different estimation specifications. Our empirical evidence sheds light on how the use of trade credit can potentially be linked to firm value from the perspective of business groups. Our findings can help stakeholders, including investors and creditors, better understand the trade credit-firm value link in the context of business groups.

KEYWORDS:

• Accounts receivable
• firm value
• business groups
• produce market competition
• large shareholder ownership

JEL CLASSIFICATION:

• G30
• G31
• G32

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Notes

1. Firms’ decisions on whether to use or extend trade credit can potentially be linked to their financing, investments, and operation policies. Prior literature presents three hypotheses on the determinants of trade credit. Based on the financing hypothesis (Martínez‐Sola, García‐Teruel, and Martínez‐Solano 2013; Petersen and Rajan 1997), extant research suggests that trade credit serves as a source of short-term financing on the demand side and facilitates financing in firms with insufficient funds on the supply side. Alternatively, proponents of the operation hypothesis argue that trade credit enhances operational functions in firms with low bargaining power (Aktas et al. 2012; Deloof and Jegers 1996; Hill, Kelly, and Lockhard 2012; Long, Malitz, and Ravid 1993) and strengthens the long-term relationship between firms and customers (Long, Malitz, and Ravid 1993; Wilner 2000). They also contend that trade credit can be used as a mechanism for price discrimination through the extension of credit terms, thus leading to a less competitive environment among firms. Further, the information asymmetry hypothesis suggests that trade credit strengthens the relationship between suppliers and customers by reducing adverse selection costs (Smith 1987). Similarly, Pike et al. (2005) and Bastos and Pindado (2007) assert that trade credit mitigates information asymmetry and moral hazard problems between firms and customers because maintaining accounts receivable allows customers to verify product quality before paying. As a result, prior studies imply that trade credit positively impacts firm value through financing, investment for business improvement, and reduction of information asymmetry between customers and suppliers.

2. According to Khanna and Rivkin (2001), a business group is ‘a set of firms which, though legally independent, are bound together by a constellation of formal and informal ties and are accustomed to taking coordinated action’ (p. 47).

3. Namely, information advantage over outside financial institution should be larger for traders within a group than stand-alone firms, by maintaining common financial management.

Additional information

Funding

This work was supported by the INHA UNIVERSITY Research Grant.