Inventory, Risk Shifting, and Trade Credit

Chod, Jiri

doi:10.1287/mnsc.2016.2515

Cited by 206 publications

(96 citation statements)

References 49 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Finally, Chod (2015) study the role of trade credit in alleviating the agency costs of debt. The focus is on a newsvendor-style firm that first secures funding-through bank debt or trade credit-and then places orders for two types of products.…”

Section: Literature Reviewmentioning

confidence: 99%

“…In contrast, when trade credit is provided by a single supplier who can directly contract upon the individual order quantities, agency costs are fully alleviated. While both Chod (2015) and the present paper discuss agency costs arising from operating flexibility, the papers differ dramatically in focus: the former looks at trade credit, while we examine the efficiency and optimal design of common financial contracts (with covenants).…”

Section: Literature Reviewmentioning

confidence: 99%

See 1 more Smart Citation

Is Operating Flexibility Harmful Under Debt?

2017

View full text Add to dashboard Cite

We study the inefficiencies stemming from a firm's operating flexibility under debt. We find that flexibility in replenishing or liquidating inventory, by providing risk-shifting incentives, could lead to borrowing costs that erase more than one-third of the firm's value. In this context, we examine the effectiveness of practical and widely used covenants in restoring firm value by limiting such risk-shifting behavior. We find that simple financial covenants can fully restore value for a firm that possesses a midseason inventory liquidation option. In the presence of added flexibility in replenishing or partially liquidating inventory, financial covenants fail, but simple borrowing base covenants successfully restore firm value. Explicitly characterizing optimal covenant tightness for all these cases, we find that better market conditions, such as lower inventory depreciation rate, higher gross margins, or increased product demand, are typically associated with tighter covenants. Our results suggest that inventory-heavy firms can reap the full benefits of additional operating flexibility, irrespective of their leverage, by entering simple debt contracts of the type commonly employed in practice. For such contracts to be effective, however, firms with enhanced flexibility and/or operating in better markets must also be willing to abide by more and/or tighter covenants. AbstractWe study the inefficiencies stemming from a firm's operating flexibility under debt. We find that flexibility in replenishing or liquidating inventory, by providing risk shifting incentives, could lead to borrowing costs that erase more than a third of the firm's value. In this context, we examine the effectiveness of practical and widely used covenants in restoring firm value by limiting such risk shifting behavior. We find that simple financial covenants can fully restore value for a firm that possesses a mid-season inventory liquidation option. In the presence of added flexibility in replenishing or partially liquidating inventory, financial covenants fail, but simple borrowing base covenants successfully restore firm value. Explicitly characterizing optimal covenant tightness for all these cases, we find that better market conditions, such as lower inventory depreciation rate, higher gross margins or increased product demand, are typically associated with tighter covenants. Our results suggest that inventory-heavy firms can reap the full benefits of additional operating flexibility, irrespective of their leverage, by entering simple debt contracts of the type commonly employed in practice. For such contracts to be effective, however, firms with enhanced flexibility and/or operating in better markets must also be willing to abide by more and/or tighter covenants.

show abstract

Section: Literature Reviewmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

Is Operating Flexibility Harmful Under Debt?

2017

View full text Add to dashboard Cite

show abstract

“…They examine the value of each scheme for both supply chain parties and find that the supplier can achieve higher profit when offering the financing portfolio. Some researchers investigate other issues related to trade credit, such as the risk‐sharing role in supply chain (Chod, ; Yang and Birge, ), the impact of credit ratings on supply chain decisions (Kouvelis and Zhao, ), and the effect of trade credit on supplier competition (Peura et al., ; Chod et al., ). Another line of researchers (Li et al., ; Shen et al., ) pay attention to the trade credit provided by the downstream buyers in supply chains, and show the significant influence of the competition between different supply chain parties on the selection of financing schemes.…”

Section: Literature Reviewmentioning

confidence: 99%

The supplier's optimal guarantee policy in newsvendor finance

Jiang

2019

Int Trans Operational Res

View full text Add to dashboard Cite

The retailer is a capital-constrained newsvendor and can borrow money from the bank if necessary. To help the retailer get a bank loan at a lower interest rate, the supplier provides guarantee for the retailer's loan up to a prespecified amount. In a Stackelberg game, the supplier decides the wholesale price and the guarantee amount as a leader, and then the retailer determines the order quantity and the amount of the loan as a follower. The supplier is risk-neutral while the retailer's risk preference is reflected by a spectral risk measure (risk-neutral, risk-averse, or risk-seeking). For a given wholesale price and guarantee amount, the retailer's objective function is quasi-concave in the order quantity. The optimal solutions for the supplier and the retailer are derived. The supplier's expected profit with optimized wholesale price increases with the guarantee amount, and thus the supplier's optimal policy is to provide a full guarantee for the retailer's loan. When the supplier can limit his guarantee responsibility by a proportion of the outstanding loan obligation, the supplier's optimal policy is also to provide a full guarantee. Even if the retailer incurs bankruptcy costs in the event of repayment default, the supplier's optimal guarantee policy remains the same in these two different forms of limited guarantee. However, when the wholesale price is exogenous, that is, not a decision variable, the full guarantee is not necessarily optimal for supplier.

show abstract

“…Jing and Seidmann () investigate the effects of bank loaning and trade credit on mitigating double marginalization and present that, if the unit production cost is relatively low, trade credit is more effective than bank credit in mitigating double marginalization. Chod () studies the effects of both bank credit and trade credit on channel members’ decisions, the result indicates that the channel members may be best off using a combination of bank loaning and supplier trade credit. Li et al.…”

Section: Literature Reviewmentioning

confidence: 99%

Optimal carbon reduction level and ordering quantity under financial constraints

Cao

et al. 2018

Int Trans Operational Res

View full text Add to dashboard Cite

Carbon tax policy is widely adopted by many countries to curb carbon emissions. In the context of carbon tax policy, firms have more incentive to improve carbon reduction levels by reducing their carbon tax costs. However, firms need to bear carbon reduction costs that may cause shortage of capital. Thus, firms may face problems of financial constraints, which may demotivate firms to produce greener products. To address the decision-making challenges of firms in the contexts of carbon tax policy and financial constraints, we consider a supply chain with a manufacturer who produces green products and a retailer who sells these products. Our study develops five models to investigate the two firms' optimal wholesale price, carbon reduction level and ordering quantity, according to the manufacturer and retailer with or without financial constraints. Our goal in this study is to explore how carbon tax policy and banks' interest rates affect the profits of the two firms, supply chain and consumer surplus. Certain managerial insights are obtained as follows. We demonstrate that carbon tax policy and banks' interest rates demotivate the manufacturer to produce greener products and demotivate the retailer to order more products. If the interest rate to the manufacturer (retailer) is relatively low, then the manufacturer with financial constraint benefits (harms) the consumers compared with the retailer with financial constraint. Importantly, our analysis suggests that carbon tax policy harms the firms but benefits consumers, and the government in some conditions should reduce unit carbon tax.

show abstract

Inventory, Risk Shifting, and Trade Credit

Cited by 206 publications

References 49 publications

Is Operating Flexibility Harmful Under Debt?

Is Operating Flexibility Harmful Under Debt?

The supplier's optimal guarantee policy in newsvendor finance

Optimal carbon reduction level and ordering quantity under financial constraints

Contact Info

Product

Resources

About