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We study the inefficiencies stemming from a firm's operating flexibility under debt. We find that flexibility in replenishing or liquidating inventory, by providing risk-shifting incentives, could lead to borrowing costs that erase more than one-third of the firm's value. In this context, we examine the effectiveness of practical and widely used covenants in restoring firm value by limiting such risk-shifting behavior. We find that simple financial covenants can fully restore value for a firm that possesses a midseason inventory liquidation option. In the presence of added flexibility in replenishing or partially liquidating inventory, financial covenants fail, but simple borrowing base covenants successfully restore firm value. Explicitly characterizing optimal covenant tightness for all these cases, we find that better market conditions, such as lower inventory depreciation rate, higher gross margins, or increased product demand, are typically associated with tighter covenants. Our results suggest that inventory-heavy firms can reap the full benefits of additional operating flexibility, irrespective of their leverage, by entering simple debt contracts of the type commonly employed in practice. For such contracts to be effective, however, firms with enhanced flexibility and/or operating in better markets must also be willing to abide by more and/or tighter covenants. History: Accepted by Serguei Netessine, operations management. Funding: G. Tsoukalas is thankful to the Fishman-Davidson Center for Service and Operations Management and to the Wharton School Dean's Research Fund for grants that supported this work. Keywords: operating flexibility * inventory management * finance * covenants * debt, 1. Introduction Operating flexibility, i.e., the ability to adapt after uncertainty resolution, carries benefits that are widely documented in the literature. These benefits notwithstanding, flexibility may also cause inefficiencies by [...]

We develop a new privacy-preserving framework for a general class of financial network models, leveraging cryptographic principles from secure multiparty computation and decentralized systems. We show how aggregate-level network statistics required for stability assessment and stress testing can be derived from real data without any individual node revealing its private information to any outside party, be it other nodes in the network, or even a central agent. Our work bridges the gap between established theories of financial network contagion and systemic risk that assume agents have full network information and the real world where information sharing is hindered by privacy and security concerns. This paper was accepted by Agostino Capponi, finance. Supplemental Material: The data files and online appendices are available at https://doi.org/10.1287/mnsc.2022.4582. [ABSTRACT FROM AUTHOR]

Problem definition: We study how a new development in entrepreneurship—crowdfunding—interacts with more traditional financing sources such as venture capital investors (VCs) and bank financing. Academic/practical relevance: Although extant literature has mainly focused on predicting crowdfunding campaign outcomes and optimal campaign design, the broader questions of how crowdfunding affects entrepreneurs and how crowdfunding platforms fit in with traditional startup financing sources, such as banks and VCs, have received relatively little attention. Methodology: We model a bargaining game with a moral-hazard problem between an entrepreneur and a bank, and a double-sided moral-hazard problem between the entrepreneur and a VC with respect to their noncontractible efforts. Results: We decompose the economic value of crowdfunding into cash gains or losses, costs of bad investments avoided, and project-payoff probability update. This economic value is generally shared between entrepreneurs and investors, benefiting both. Moreover, crowdfunding can help to overcome the agency problems. However, crowdfunding can also harm the entrepreneur and the VC. Competition from other investors reduces value to VCs, who may walk away from the deal entirely. This can hurt entrepreneurs who lose out on valuable VC operational expertise (operational support, access to supplier networks, etc.). Managerial implications: The model provides a theoretical underpinning for recent empirical observations that some projects lose VC financing after successful crowdfunding campaigns. Our results complement earlier studies in operations management by demonstrating that the entrepreneurs' objectives are more complex than simply maximizing the payoffs from crowdfunding campaigns. [ABSTRACT FROM AUTHOR]