Does economic policy uncertainty affect trade credit and firm value in Korea? A comparison of chaebol vs. non-chaebol firms

This paper investigates how economic policy uncertainty (EPU) affects trade credit and firm value of business group-affiliated firms (chaebol firms) and stand-alone firms (non-chaebol firms) in Korea over the period 1994–2019. We find a robust negative relationship between EPU and trade credit for all Korean firms using alternative measures of EPU and trade credit. We also find evidence that small chaebol firms, being presumably more financially constrained in the post-Asian financial crisis period, tend to respond more fiercely to changes in EPU and curtail their trade credits in greater amounts compared to large chaebol firms and non-chaebol firms. Further analysis suggests that cutting trade receivables during periods of high EPU increases firm value, especially for small chaebol firms; however, this relationship is non-linear. Accordingly, trade receivables cutbacks during periods of elevated EPU only increase firm value up to a certain point, beyond which it leads to value erosion. Taken together, our findings confirm the intuitive projection that under Korea’s unique market settings, different chaebol groups respond differently to impending policy uncertainties.