Operational Investment and Capital Structure Under Asset Based Lending: A One Period Model

Alan, Yasin; Gaur, Vishal

doi:10.2139/ssrn.1716925

Cited by 22 publications

(12 citation statements)

References 37 publications

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“…The rapidly growing literature on the operations-finance interface examines the interplay between firms' operational decisions and financial frictions. Papers such as Babich and Sobel (2004), Buzacott and Zhang (2004), Xu and Birge (2004), Gaur and Seshadri (2005), Caldentey and Haugh (2006), and Ding et al (2007), Boyabatlı and Toktay (2011), Alan and Gaur (2011), Dong and Tomlin (2012), Li et al (2013), andDong et al (2015) focus on joint operational and financial decision-making in individual companies. Several more closely related papers in this stream have examined how financial constraints influence supply chain performance: Dada and Hu (2008) study a cash-constrained retailer's optimal ordering quantity when facing a profit-maximizing bank ;Lai et al (2009) discuss whether a cash-constrained supplier should operate in pre-order or consignment mode; Caldentey and Chen (2010) propose a contract where the supplier offers partial credit to the budget-constrained retailer; Kouvelis and Zhao (2011) study the optimal price-only contract when selling to a cash-constrained newsvendor when bankruptcy is costly.…”

Section: Related Literaturementioning

confidence: 99%

“…Second and relatedly, to focus on the implications of various external financing sources on firms' short-term operational decisions, our model assumes that a retailer's long-term capital structure, as captured by cash level K, is exogenous. Yet, in practice, a firm's long-term capital structure is also endogenously determined by its operational characteristics (Alan and Gaur 2011). However, even when firms operate under their own optimal long-term capital structure, the difference in demand patterns between the two groups of firms means that they should still face different financing needs temporarily, i.e., firms in the high group are likely to have higher financing need at the end of Q3 than those in the low group.…”

Section: Using An Operational Measure To Proxy For Financing Needmentioning

confidence: 99%

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Trade Credit, Risk Sharing, and Inventory Financing Portfolios

2018

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As an integrated part of a supply contract, trade credit has intrinsic connections with supply chain coordination and inventory management. Using a model that explicitly captures the interaction of firms' operations decisions, financial constraints, and multiple financing channels (bank loans and trade credit), this paper attempts to better understand the risk-sharing role of trade credit -that is, how trade credit enhances supply chain efficiency by allowing the retailer to partially share the demand risk with the supplier. Within this role, in equilibrium, trade credit is an indispensable external source for inventory financing, even when the supplier is at a disadvantageous position in managing default relative to a bank. Specifically, the equilibrium trade credit contract is net terms when the retailer's financial status is relatively strong. Accordingly, trade credit is the only external source that the retailer uses to finance inventory. By contrast, if the retailer's cash level is low, the supplier offers two-part terms, inducing the retailer to finance inventory with a portfolio of trade credit and bank loans. Further, a deeper early-payment discount is offered when the supplier is relatively less efficient in recovering defaulted trade credit, or the retailer has stronger market power. Trade credit allows the supplier to take advantage of the retailer's financial weakness, yet it may also benefit both parties when the retailer's cash is reasonably high. Finally, using a sample of firm-level data on retailers, we empirically observe the inventory financing pattern that is consistent with what our model predicts.

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Section: Related Literaturementioning

confidence: 99%

Section: Using An Operational Measure To Proxy For Financing Needmentioning

confidence: 99%

Trade Credit, Risk Sharing, and Inventory Financing Portfolios

2018

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“…Concerning category (1), many contributions have been already made (Buzacott and Zhang, 2004;Dada and Hu, 2008;Xu and Birge, 2008;Lai et al, 2009;Yang and Birge, 2011;Kouvelis and Zhao, 2011;Alan and Gaur, 2012). These studies generally consider an extended newsvendor setting to explore how financing decisions by the firm, its supplier, its customer, and/or financial intermediary, may impact the firm's ordering decision and the supply chain as a whole.…”

Section: Literaturementioning

confidence: 99%

An Assessment of Supply Chain Finance and Working Capital Management in Organizations

Dass¹

2019

AJMS

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The wave of globalization have dispersed supply chain internationally as production moved beyond national boundaries. Information Technology &communication have made the operations of supply chain much easier and all pervasive. The demands for operating globally has increased and businesses have transformed and identified valuable hidden sources to tap liquidity from within their own processes. [1]. Supply chain finance (SCF) is a hot topic in business circles and connects with supply chain management and trade finance. Organizations the world over are trying to merge the approach of supply chain management and trade finance into tangible benefits. With cash drying up & credit squeeze, Organizations are tapping new sources to finance their working capital needs and avenues for cost reduction are being explored in the entire supply chain. Financial managers have taken the lead to acquirecash and generate savings from supply chain logistics. For Organizations, working capital management is a key priority for increasing profitability without compromising on the day-to-day liquidity available for business. SCF is a niche segment in liquidity management & enormous value can be derived by pulling unnecessary cash locked from the processes in supply chain. This paper is an attempt to study the various supply chain finance topics in discussion today and how it is affects the working capital of an Organization. [2]

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“…In this stream of literature, Xu and Birge (2004), Babich and Sobel (2004), Dada and Hu (2008), Boyabatlı and Toktay (2011), Alan and Gaur (2011), Dong and Tomlin (2012), Li et al (2013), Chod and Zhou (2013), and Luo and Shang (2013) study how a firm links its operational decisions, such as inventory and capacity investment, to its financing decisions in the presence of financial market imperfections. Yang and Birge (2009), Kouvelis and Zhao (2011), and Kouvelis and Zhao (2012) examine how to structure different types of supply chain contracts when one party in the supply chain is financially constrained.…”

Section: Related Literaturementioning

confidence: 99%

When Customers Anticipate Liquidation Sales: Managing Operations Under Financial Distress

Birge

Parker

et al. 2017

M&SOM

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The presence of strategic customers may force an already financially distressed firm into a death spiral: Sensing the firm's financial difficulty, customers may wait strategically for deep discounts in liquidation sales. In turn, such waiting lowers the firm's profitability and increases the firm's bankruptcy risk. Using a two-period model to capture these dynamics, this paper identifies customers' strategic waiting behavior as a source of a firm's cost of financial distress. We also find that customers' anticipation of bankruptcy can be self-fulfilling: When customers anticipate a high bankruptcy probability, they prefer to delay their purchases, making the firm more likely to go bankrupt than when customers anticipate a low probability of bankruptcy. Such behavior has important operational and financial implications. First, the firm acts more conservatively when either facing more severe financial distress or a large share of strategic customers. As its financial situation deteriorates, the firm lowers inventory alone when financial distress is mild or only a small share of customers are strategic and lowers both inventory and price in the presence of severe financial distress and a large fraction of strategic customers. Under optimal price and inventory decisions, strategic waiting accounts for a large part of the firm's total cost of financial distress, although a larger proportion of strategic customers may result in a lower probability of bankruptcy. In addition to inventory reduction and (immediate) price discount, we find that a deferred discount, in the form of rebates and/or store credits for future purchases, can act as an effective mechanism to mitigate strategic waiting. As a contingent price reduction, deferred discounts align the interests of customers and the firm and are most effective when the fraction of strategic customers is high and the firm's financial distress is at a medium level.

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Operational Investment and Capital Structure Under Asset Based Lending: A One Period Model

Cited by 22 publications

References 37 publications

Trade Credit, Risk Sharing, and Inventory Financing Portfolios

Trade Credit, Risk Sharing, and Inventory Financing Portfolios

An Assessment of Supply Chain Finance and Working Capital Management in Organizations

When Customers Anticipate Liquidation Sales: Managing Operations Under Financial Distress

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