Research on Inventory Decision of Loss-aversion Firms under Debt Financing

By constructing the optimal inventory decision model of loss-aversion firm with and without debt, we analyze the influence of debt on firm’s inventory decision, and discuss the influence of loss aversion, production cost, and shortage cost on the firm’s optimal inventory. We show that when the firm is risk neutral, its optimal inventory is smaller under debt. The effects of debt on optimal inventory decreases with shortage cost and increases with production cost. However, the relationship of debt and optimal inventory is not clear when the firm is loss-averse.