Research on Inventory Decision of Loss-aversion Firms under Debt Financing

Cao Guozhao^1, , Li Yuge¹ and Luo Haiwen¹

¹School of Economics and Management, Shanxi Univesity, Taiyuan, China

Cite this paper:
Cao Guozhao, Li Yuge and Luo Haiwen. Research on Inventory Decision of Loss-aversion Firms under Debt Financing. Journal of Finance and Economics. 2018; 6(6):209-212. doi: 10.12691/jfe-6-6-1

Abstract

By constructing the optimal inventory decision model of loss-aversion firm with and without debt, we analyze the influence of debt on firm’s inventory decision, and discuss the influence of loss aversion, production cost, and shortage cost on the firm’s optimal inventory. We show that when the firm is risk neutral, its optimal inventory is smaller under debt. The effects of debt on optimal inventory decreases with shortage cost and increases with production cost. However, the relationship of debt and optimal inventory is not clear when the firm is loss-averse.

Keywords:
inventory loss aversion risk neutral shortage cost production cost

This work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/

References:

[1]	Van Mieghem. Capacity management, investment, and hedging: review and recent developments. Manufacturing & Service Operations Management, 2003, 5(4): 269-302.
[2]	J Ni, L K Chu, B P.C. Yen. Coordinating operational policy with financial hedging for risk-averse firms. Omega, 2016, 59: 279-289.
[3]	Schweitzer M E, Cachon G P. Decision bias in the newsvendor problem with a known demand distribution: experimental evidence. Management Science. 2000, 46: 404-20.
[4]	J Ni, L K Chu, Q Li. Capacity decisions with debt financing: The effects of agency problem. European Journal of Operational Research, 2017, 261: 1158-1169.
[5]	John R. Birge. Operations and finance interactions. Manufacturing & Service Operations Management, 2015, 17(1): 4-15.
[6]	Chod J, Zhou J. Resource Flexibility and Capital Structure. Management Science.2013, 3(60):708-729.