Agency Cost of Debt: A Case for Supplier Financing

Jiri Chod

Foundations and Trends(R) in Technology, Information and Operations Management, 2017, vol. 10, issue 3-4, 220-236

Abstract: In this paper, we first show how debt financing distorts the inventory decision of a multi–product retail firm. Protected by limited liability, a debt–financed retailer seeks risk by favoring items with a low salvage value, those with a high profit margin, and those that represent a large share of the total inventory investment. Second, we demonstrate that in many cases, this distortion can be avoided by using supplier financing. A supplier who automatically observes the retailer’s order quantities, can deter risk–seeking behavior on the part of the retailer with the threat of stricter credit terms. This provides suppliers with a financing advantage over banks, which can monitor inventory only at a cost.

Keywords: Supplier financing; Supply chain finance; Cost of capital (search for similar items in EconPapers)
JEL-codes: G20 G32 M11 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1561/0200000061 (application/xml)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:now:fnttom:0200000061

Access Statistics for this article

More articles in Foundations and Trends(R) in Technology, Information and Operations Management from now publishers
Bibliographic data for series maintained by Lucy Wiseman ().