Abstract

This paper empirically investigates how firm's debt structure is related to sales performance during the Global Financial Crisis using extensive Korean firm-level balance sheet data. By distinguishing firms by a position in stock exchange, size, and foreign ownership, this paper provides evidence to which type of external financing sales growth was particularly vulnerable during the crisis and how it varied by firm's financial development. I find that a negative relationship between sales growth and leverage is prominent through short-term and foreign currency denominated trade credit, followed by short-term bank credit. An interesting finding is that while higher use of bank credit is associated with lower sales growth of financially constrained firms only, higher use of trade credit is linked to slower sales growth of both financially constrained and unconstrained firms. It suggests that trade credit is a special type of external financing, bottom in the pecking order, which acts as financing of last resort, and that other forms of financing (i.e. bank credit) cannot serve as a substitute for trade credit when liquidity dries up during a crisis.