Financing constraints and reordering rules

Alistair Milne

doi:10.1016/0925-5273(96)00013-8

Financing constraints and reordering rules

1996-08-01

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Alistair Milne *

DOI：10.1016/0925-5273(96)00013-8

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Constraints on external finance modify a simple inventory investment decision. Optimal policy is no action when cash holdings are less than threshold levels (the control boundaries) which are functions of the current level of inventories. On the control boundaries additional cash is used for inventory replenishment, when inventory holdings are below the level which would be held in the absence of financing constraints, and for dividend payment, when inventory holdings are equal to or exceed this level. A fixed boundary at all inventory levels is used as an approximation to the fully optimal control allowing computation of the behaviour of aggregate inventory and cash holdings for a population of financially constrained firms. There is a pronounced and extended dynamic response from inventory investment following aggregate disturbances to cash holdings, to prices, and to the standard error of the diffusion process for cash holdings. This contrasts with the unconstrained case where such shocks have no effect on either inventory holdings or inventory investment.

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inventory dynamics

financial constraints

Financing constraints and reordering rules

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