Supply Chain Finance and Impacts of Consumers’ Sustainability Awareness
Forthcoming in The North American Journal of Economics and Finance. DOI/10.1016/j.najef.2019.04.005
26 Pages Posted: 14 May 2019 Last revised: 3 Aug 2021
Date Written: April 13, 2019
Several new methods have been proposed for supply chain finance (SCF) with bank credits, but none of them mentions how to solve the borrowers' moral hazard problems in SCF. This paper examines the moral hazard problem in supply chain financing with procurement contract (or purchase order). We show that since supply chain is an up-down directed structure, when financing with the procurement contract, the supplier's effort monitoring task can be rendered to the procurement contract, which can secure the supplier's optimal effort and capital choices in production. Hence, compared to separate lending, the supplier's credit rationing problem can be mitigated, and most importantly, banks' under-estimation on the supplier's default risk and the over-estimation on the retailer's default risk will both decrease. We further show that the retailer's corporate social responsibility expenditure can increase consumers' brand recognition, thus when facing demand shocks arising from consumer's unexpected concerns, the retailer can better stabilize the firm value.
Keywords: Supply Chain Finance, Bank Credit, Moral Hazard, Default Risk, Corporate Social Responsibility
JEL Classification: G21, M11, M14
Suggested Citation: Suggested Citation