Financing Equilibrium Research Articles

Managing supplier financial distress with advance payment discount and purchase order financing

We examine a capital-constrained supply chain in which a small- and medium-sized enterprise (SME) supplier sells to an established retailer via a wholesale price contract. To mitigate the supplier's financial distress, the retailer chooses between two pre-shipment finance instruments: advance payment discount (APD) and buyer-backed purchase order financing (BPOF). When either APD or BPOF can be chosen, the retailer prefers APD to BPOF if her internal asset level is above a certain threshold. When both APD and BPOF are adopted, the retailer prefers APD and does not initiate BPOF unless the marginal cost of financial distress dominates the benefit of unit discount. We show that the financing equilibrium region of APD increases not only with the retailer's internal capital level, but also with demand variability. The interval and magnitude of the competition penalty incentivizes collaboration between supply chain partners.

Financing preferences and performance for an emission-dependent supply chain: Supplier vs. bank

Many small and middle-sized enterprises (SMEs) with capital constraints have two primary short-term financing modes: internal financing (supplier) and external financing (bank). We consider an emission-dependent supply chain with one supplier and one emission-dependent manufacturer that are capital-constrained and in need of short-term financing. We investigate the financing preferences of the supply chain from a competitive bank or supplier when demand is uncertain and consumers have low-carbon preferences. Under the cap-and-trade system, we show that the existence of investments in carbon abatement will have no impact on the selection of financing mode. We find that the supplier's trade credit financing serves as a unique financing equilibrium for manufacturers regardless of whether investments in carbon abatement are considered. Irrespective of the chosen financing equilibrium, if a manufacturer chooses to invest in carbon abatement, the dominant supplier will offer a wholesale price to prompt the manufacturer to choose the largest feasible carbon emission reduction and maximize his profit. In addition, we present a set of numerical analyses to compare the results of different financing modes and the financing equilibrium with and without carbon abatement, and we analyze the impacts of key parameters on the performance of supply chain members.

Retailer Early Payment Financing in Pull Supply Chains

This paper investigates the efficacy of zero-interest early payment financing (alternatively referred to as early payment) and positive-interest in-house factoring financing in a pull supply chain with a capital-constrained manufacturer selling a product through a capital-abundant retailer. Early payment is the prepayment of a wholesale cost to the manufacturer, whereas in-house factoring is a loan service provided to the manufacturer by a branch financing firm of the same retailer. We find that the retailer prefers early payment financing to bank financing when the manufacturer’s production cost is low. If the retailer instead offers positive-interest inhouse factoring financing to the manufacturer, then the financing equilibrium domain enlarges as compared to bank financing. Interestingly, early payment financing can outplay positive-interest in-house factoring financing if the production cost is considerably low; otherwise, vice versa. When the production cost is big enough, the retailer will not provide either early payment or in-house factoring. Furthermore, our main qualitative result sustains with an identical wholesale price across all three financing schemes and the financing equilibrium domain of early payment shrinks as demand variability grows.

A partial credit guarantee contract in a capital-constrained supply chain: Financing equilibrium and coordinating strategy

In this study, we first design a supply chain finance (SCF) system comprising a capital-constrained retailer, a manufacturer, and a commercial bank, and formulate a bilevel Stackelberg game model in which the bank acts as a leader. Second, we design a partial credit guarantee (PCG) contract for SCF, incorporating the bank credit financing (BCF) and manufacturer׳s trade credit guarantee, to analyze its equilibrium financing strategies. Third, we explore the interdependencies between the operational and financial decisions and analyze the coordination conditions for the PCG contract. Fourth, we perform a comparative analysis of the optimal strategies among the various financing scenarios, including a traditional supply chain without capital constraint and SCF without credit guarantee as well as one with full credit guarantee, to examine the impact of the credit guarantee coefficient. Finally, we perform a numerical sensitivity analysis in terms of the manufacturer׳s guarantee coefficient and the retailer׳s initial capital, and verify the manufacturer׳s willingness to provide PCG for SCF. The findings of this study reveal that based on a suitable guarantee coefficient, the PCG contract may realize profit maximization and channel coordination in the SCF system as well as achieve the super-coordination effect.

Investigating Determining Factors of the Financial Structure in a Context of an Underdeveloped Financial Market: An Example of Cameroonian SMEs

This study examines the determinants of the financial structure in a context where the financial market is still embryonic. From a sample of 62 enterprises, the research carried out permit to highlight the fact that the financial structure in the small and medium size enterprises is more influenced by certain profile characteristics than others. Thus, the structure of shareholding, the size stated in terms of the number of employees and the nature of property, introduce a high discrimination between non rated enterprises and this with regards to the importance of their owned capital. Also, the importance of negative working capital and the speed of economic access explain the differences between group of enterprises from the point of view of financing equilibrium, as well as the distribution rate of the dividends and profitability which are reputed in explaining significantly the differences in the indebtedness rate as far as the SME of our sample are concerned.

A model of trade credit in a capital-constrained distribution channel

In a product market with uncertain demand, we examine a distribution channel consisting of one manufacturer and one capital-constrained retailer. The retailer may fund its business by borrowing credit either from a competitive bank market or from the manufacturer, provided it is also to the latter׳s benefit to extend trade credit. Under bank credit financing, we show that the channel behaves as if the retailer is not constrained by capital. In a wholesale price contract, we find that trade credit makes both channel members better off and is the unique financing equilibrium; trade credit better integrates the channel than bank credit by centralizing the financing of distribution at the manufacturer. We further compare bank versus trade credit under a classical channel contract, revenue sharing contract. In addition, we present a set of numerical experiments to show how product cost, internal capital, and demand variability impact on the market equilibrium under both bank and trade credits.

When are preferred shares preferred? Theory and empirical evidence

This paper demonstrates that preferred stock may arise as an optimal security in a tax-induced equilibrium. This result is driven by graduated tax schedules and by uncertainty. In a more general sense, our results can be interpreted as a template for including any security with a different tax treatment in a firm's capital structure. The first part of the paper demonstrates that the Miller equilibrium framework can accommodate more than two securities if different investor classes are taxed differently on each security and the tax schedule for each investor group is upward sloping. We then simplify the tax schedule, but introduce uncertainty, which implies the possibility of bankruptcy and the possible loss of tax shelters. The interaction of tax rates and seniority now affects the contribution of each security to after-tax firm value, as in some states the firm may not be able to pay either interest (or dividends) or even principal to its various claimholders. It is shown why and how these features, i.e. the various tax rates and seniority, determine the financing equilibrium, which is obtained by equating the expected marginal tax benefit of all securities. We demonstrate that non-profitable firms will tend to issue preferred shares whereas profitable firms will not find preferred stock advantageous in our framework. Comparative statics with respect to various tax rates are derived as well. These predictions are tested using a large sample of firms for the last 25 years. The empirical testing broadly confirms the theoretical predictions.

Going-Public and the Influence of Disclosure Environments

This paper analyzes how differences in disclosure environments affect the firm’s choice between private and public capital. Disclosure requirements prescribe to what extent the firm has to release private information that may lead to the firm incurring proprietary costs. We examine which firm types go public in equilibrium, and how the equilibrium outcomes change with changes in the disclosure environments. Our findings show that in a partial financing equilibrium, should such an equilibrium exist, good firms finance privately. This result is robust to changes in the disclosure environment.