Publication
Title
Capital stock management during a recession that freezes credit markets
Author
Abstract
This paper considers the problem of how to price a conspicuous product while maintaining liquidity during a recession which both reduces demand and freezes credit markets. Reducing price would help maintain cash flow, but low prices can erode brand image and, hence, long-term sales. The paper extends earlier work of the same authors by explicitly deriving a firm's optimal cash management behavior, taking into account that a too low cash level results in bankruptcy. There are different sets of initial conditions for which qualitatively different solution trajectories are optimal. We distinguish mild and severe recessions. With mild recessions bankruptcy can be avoided for sure when the brand image is large enough. In case the recession is of intermediate strength, it can be optimal to throttle forward then back how aggressively one spends down cash reserves, with the associated state constraint alternately being non-binding, binding, non-binding, then binding in such a way that the firm ceases operation. (C) 2015 Elsevier B.V. All rights reserved.
Language
English
Source (journal)
Journal of economic behavior and organization. - Amsterdam
Publication
Amsterdam : 2015
ISSN
0167-2681
Volume/pages
116(2015), p. 1-14
ISI
000358393000001
Full text (Publisher's DOI)
Full text (publisher's version - intranet only)
UAntwerpen
Faculty/Department
Research group
Publication type
Subject
Affiliation
Publications with a UAntwerp address
External links
Web of Science
Record
Identification
Creation 03.09.2015
Last edited 20.06.2017
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