Inventory Management and Debt Maturity Structure

Abstract

The current literature on the coordination of operations and finance does not differentiate long‐ and short‐term debts and therefore is silent on how firms’ debt maturity structure affects their short‐run financial and operational decisions. Through a dynamic inventory model that explicitly captures a firm's periodic decisions on inventory replenishment quantity, the amount of dividends net of capital subscriptions, and the amount of short‐term debt, we demonstrate that under coordinated short‐term operational and financial decisions, the firm's optimal inventory level increases initially as its long‐term debt rises; after the firm depletes its short‐term borrowing capacity, as the long‐term debt rises further, the inventory level decreases and then remains constant. In addition, we find that optimal coordinated decisions, in comparison with decentralized ones, yield lower inventories, require less cash, take larger short‐term loans, incur a lower probability of financial distress, and yield higher expected dividends net of capital subscriptions. Moreover, long‐ and short‐term debts are substitutes; an optimally leveraged firm needs less long‐term debt if it coordinates its short‐term decisions than if it decentralizes them.