Abstract
There are relationships between firm's operational activities and financing decisions. Goods is a base for operation management, while trade credit plays an important role in firm's financing decision. This paper integrates these two important concepts through inventory decision. By introducing the factors, such as financial distress cost and bargaining power, this paper discusses how firm make his optimal inventory decision. Considering the optimal inventory-holding decision and optimal cash-holding decision under financial constraints, the adjusted financial distress probability is introduced as a key index. With those above, this paper models the optimal inventory-holding and optimal cash-holding. By the theoretical and numerical analysis, when the supplier's trade credit is the only debt financing source, the paper finds that the supplier's trade credit has a positive effect on the firm's optimal decisions, but it is surprised that firm's trade credit for its customer has little effect on his optimal decision, which may be an interesting topic for further research.
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