Seminar (Dept. of Management Science and Engineering)

Title: Financing the Newsvendor through A Captive Company

Speaker: Wenhui Zhao (Antai College Economics-Management, Shanghai Jiao Tong University)

Time: 10:00 (Wednesday), January 10th, 2024

Venue: Room 706, Mingde Business Building

Language: Chinese/English

ABSTRACT:

We study the benefit for a manufacturer (he) to found a captive company, a wholly- or partially-owned subsidiary, to finance the inventory of a capital constrained retailer (she), who procures a product from the manufacturer to satisfy the upcoming uncertain demand. The retailer can borrow from banks, take trade credits of the manufacturer, or borrow from the captive. Comparing with leaving the retailer borrowing from an independent bank, the manufacturer can increase his profit by controlling the captive to provide more attractive finance to the retailer. Under trade credits, the manufacturer may have to borrow from outside investors, to overcome the limit of his own working capital. However, it may also expose the manufacturer to higher default risk rooted from financing the retailer. On the other hand, while the captive can serve as a risk shield of the manufacturer, it might reduce the profitability of the manufacturer, who can only claim part of the benefits from financing the retailer as the dividend, according to his share of the captive company. We show that when the retailer's credit rating is not too low and manufacturer's credit rating is not too high, captive financing can simultaneously benefit the three parties: the manufacturer, the retailer, and the outside investors. The result may serve as an explanation of the prevalence of captive finance practice.