IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v58y2012i10p1933-1951.html
   My bibliography  Save this article

Supply Chain Performance Under Market Valuation: An Operational Approach to Restore Efficiency

Author

Listed:
  • Guoming Lai

    (McCombs School of Business, University of Texas at Austin, Austin, Texas 78712)

  • Wenqiang Xiao

    (Stern School of Business, New York University, New York, New York 10012)

  • Jun Yang

    (School of Management, Huazhong University of Science and Technology, Wuhan, 430074 Hubei, China)

Abstract

Based on a supply chain framework, we study the stocking decision of a downstream buyer who receives private demand information and has the incentive to influence her capital market valuation. We first characterize a market equilibrium under a general, single buyback contract. We show that the buyer's stocking decision can be distorted in equilibrium. Such a downstream stocking distortion hurts the buyer firm's own performance, and it also influences the performances of the supplier and the supply chain. We further reveal scenarios where full supply chain efficiency cannot be reached under any single buyback contract. Then, focusing on contract design, we characterize conditions under which a menu of buyback contracts can prevent downstream stocking distortion and restore full efficiency in the supply chain. Our study demonstrates that in a supply chain context, a firm's incentive to undertake real economic activities to influence capital market valuation can potentially be resolved through operational means. This paper was accepted by Yossi Aviv, operations management.

Suggested Citation

  • Guoming Lai & Wenqiang Xiao & Jun Yang, 2012. "Supply Chain Performance Under Market Valuation: An Operational Approach to Restore Efficiency," Management Science, INFORMS, vol. 58(10), pages 1933-1951, October.
    • Handle: RePEc:inm:ormnsc:v:58:y:2012:i:10:p:1933-1951
    DOI: 10.1287/mnsc.1120.1523
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.1120.1523
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.1120.1523?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. repec:bla:jindec:v:45:y:1997:i:4:p:429-43 is not listed on IDEAS
    2. Fuqiang Zhang, 2010. "Procurement Mechanism Design in a Two-Echelon Inventory System with Price-Sensitive Demand," Manufacturing & Service Operations Management, INFORMS, vol. 12(4), pages 608-626, August.
    3. Özalp Özer & Wei Wei, 2006. "Strategic Commitments for an Optimal Capacity Decision Under Asymmetric Forecast Information," Management Science, INFORMS, vol. 52(8), pages 1238-1257, August.
    4. Jeremy C. Stein, 1989. "Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(4), pages 655-669.
    5. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 179-221.
    6. Hao Zhang & Mahesh Nagarajan & Greys Sošić, 2010. "Dynamic Supplier Contracts Under Asymmetric Inventory Information," Operations Research, INFORMS, vol. 58(5), pages 1380-1397, October.
    7. Hamilton Emmons & Stephen M. Gilbert, 1998. "Note. The Role of Returns Policies in Pricing and Inventory Decisions for Catalogue Goods," Management Science, INFORMS, vol. 44(2), pages 276-283, February.
    8. Simi Kedia & Thomas Philippon, 2009. "The Economics of Fraudulent Accounting," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2169-2199, June.
    9. Kevin B. Hendricks & Vinod R. Singhal, 2009. "Demand-Supply Mismatches and Stock Market Reaction: Evidence from Excess Inventory Announcements," Manufacturing & Service Operations Management, INFORMS, vol. 11(3), pages 509-524, September.
    10. Barry Alan Pasternack, 1985. "Optimal Pricing and Return Policies for Perishable Commodities," Marketing Science, INFORMS, vol. 4(2), pages 166-176.
    11. Richard Kum-yew Lai, 2005. "Inventory Signals," Microeconomics 0509001, University Library of Munich, Germany.
    12. Svend Albæk & Peter Møllgaard & Per B. Overgaard, 1997. "Government‐Assisted Oligopoly Coordination? A Concrete Case," Journal of Industrial Economics, Wiley Blackwell, vol. 45(4), pages 429-443, December.
    13. Terry A. Taylor & Wenqiang Xiao, 2009. "Incentives for Retailer Forecasting: Rebates vs. Returns," Management Science, INFORMS, vol. 55(10), pages 1654-1669, October.
    14. Xuanming Su & Fuqiang Zhang, 2008. "Strategic Customer Behavior, Commitment, and Supply Chain Performance," Management Science, INFORMS, vol. 54(10), pages 1759-1773, October.
    15. Pierre Jinghong Liang & Xiaoyan Wen, 2007. "Accounting Measurement Basis, Market Mispricing, and Firm Investment Efficiency," Journal of Accounting Research, Wiley Blackwell, vol. 45(1), pages 155-197, March.
    16. Gérard P. Cachon & Martin A. Lariviere, 2001. "Contracting to Assure Supply: How to Share Demand Forecasts in a Supply Chain," Management Science, INFORMS, vol. 47(5), pages 629-646, May.
    17. Johan Stennek, 1997. "Coordination in Oligopoly," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(4), pages 541-554, December.
    18. Martin A. Lariviere & Evan L. Porteus, 2001. "Selling to the Newsvendor: An Analysis of Price-Only Contracts," Manufacturing & Service Operations Management, INFORMS, vol. 3(4), pages 293-305, May.
    19. Anil Arya & Brian Mittendorf, 2011. "Disclosure standards for vertical contracts," RAND Journal of Economics, RAND Corporation, vol. 42(3), pages 595-617, September.
    20. Bebchuk, Lucian Arye & Stole, Lars A, 1993. "Do Short-Term Objectives Lead to Under- or Overinvestment in Long-Term Projects?," Journal of Finance, American Finance Association, vol. 48(2), pages 719-729, June.
    21. Hong Chen & Murray Z. Frank & Owen Q. Wu, 2005. "What Actually Happened to the Inventories of American Companies Between 1981 and 2000?," Management Science, INFORMS, vol. 51(7), pages 1015-1031, July.
    22. Guoming Lai & Laurens Debo & Lin Nan, 2011. "Channel Stuffing with Short-Term Interest in Market Value," Management Science, INFORMS, vol. 57(2), pages 332-346, February.
    23. Ronald A. Dye & Sri S. Sridhar, 2004. "Reliability‐Relevance Trade‐Offs and the Efficiency of Aggregation," Journal of Accounting Research, Wiley Blackwell, vol. 42(1), pages 51-88, March.
    24. Gérard P. Cachon & Martin A. Lariviere, 2005. "Supply Chain Coordination with Revenue-Sharing Contracts: Strengths and Limitations," Management Science, INFORMS, vol. 51(1), pages 30-44, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cao, Yiqiu & Wang, Qiangqiang, 2022. "The informational role of guarantee contracts," European Journal of Operational Research, Elsevier, vol. 301(1), pages 191-202.
    2. Jiri Chod & Nikolaos Trichakis & Gerry Tsoukalas, 2019. "Supplier Diversification Under Buyer Risk," Management Science, INFORMS, vol. 65(7), pages 3150-3173, July.
    3. Zhou, Cuihua & Lan, Yanfei & Li, Weifeng & Zhao, Ruiqing, 2022. "Medicare policies in a two-Tier healthcare system with overtreatment," Omega, Elsevier, vol. 109(C).
    4. Yang, Jun & Lu, Wei & Zhou, Chunhui, 2014. "The immediate impact of purchasing/sales contract announcements on the market value of firms: An empirical study in China," International Journal of Production Economics, Elsevier, vol. 156(C), pages 169-179.
    5. Ioannis N. Pinopoulos, 2020. "Input Price Discrimination and Upstream R&D Investments," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 57(1), pages 85-106, August.
    6. Guoming Lai & Wenqiang Xiao, 2018. "Inventory Decisions and Signals of Demand Uncertainty to Investors," Manufacturing & Service Operations Management, INFORMS, vol. 20(1), pages 113-129, February.
    7. Mingzhu Yu & Ruina Yang & Zelong Yi & Xuwen Cong, 2020. "Contracting in Ocean Shipping Market Under Asymmetric Information," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 37(02), pages 1-24, March.
    8. Yang, Ruina & Yu, Mingzhu & Lee, Chung-Yee & Du, Yuquan, 2021. "Contracting in ocean transportation with empty container repositioning under asymmetric information," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 145(C).
    9. Qi Wu & Guoming Lai, 2022. "The Effects of Stock-Based Incentives on Inventory Management," Management Science, INFORMS, vol. 68(7), pages 5068-5086, July.
    10. Khouja, Moutaz & Zhou, Jing, 2017. "An off-price retailer with two ordering opportunities and demand updating," International Journal of Production Economics, Elsevier, vol. 188(C), pages 128-138.
    11. William Schmidt & Ryan W. Buell, 2017. "Experimental Evidence of Pooling Outcomes Under Information Asymmetry," Management Science, INFORMS, vol. 63(5), pages 1586-1605, May.
    12. So Yeon Chun & Dan A. Iancu & Nikolaos Trichakis, 2020. "Loyalty Program Liabilities and Point Values," Manufacturing & Service Operations Management, INFORMS, vol. 22(2), pages 257-272, March.
    13. Jiri Chod & Nikolaos Trichakis & Gerry Tsoukalas & Henry Aspegren & Mark Weber, 2020. "On the Financing Benefits of Supply Chain Transparency and Blockchain Adoption," Management Science, INFORMS, vol. 66(10), pages 4378-4396, October.
    14. Laurens Debo & Uday Rajan & Senthil K. Veeraraghavan, 2020. "Signaling Quality via Long Lines and Uninformative Prices," Manufacturing & Service Operations Management, INFORMS, vol. 22(3), pages 513-527, May.
    15. Xiaoyan Liu & William Schmidt, 2022. "Operational Distortion: Compound Effects of Short-Termism and Competition," Management Science, INFORMS, vol. 68(8), pages 5907-5923, August.
    16. Khouja, Moutaz & Christou, Eliana & Stylianou, Antonis, 2020. "A heuristic approach to in-season capacity allocation in a multi-product newsvendor model," Omega, Elsevier, vol. 95(C).
    17. Shou, Biying & Fang, Yaner & Li, Zhaolin, 2022. "Information acquisition and voluntary disclosure with supply chain and capital market interaction," European Journal of Operational Research, Elsevier, vol. 297(3), pages 878-889.
    18. Qinghua Li & Bo Li & Ping Chen & Pengwen Hou, 2017. "Dual-channel supply chain decisions under asymmetric information with a risk-averse retailer," Annals of Operations Research, Springer, vol. 257(1), pages 423-447, October.
    19. Qing Ye & Izak Duenyas & Roman Kapuscinski, 2013. "Should competing firms reveal their capacity?," Naval Research Logistics (NRL), John Wiley & Sons, vol. 60(1), pages 64-86, February.
    20. Basak Kalkanci & Erica L. Plambeck, 2020. "Managing Supplier Social and Environmental Impacts with Voluntary Versus Mandatory Disclosure to Investors," Management Science, INFORMS, vol. 66(8), pages 3311-3328, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Guoming Lai & Wenqiang Xiao, 2018. "Inventory Decisions and Signals of Demand Uncertainty to Investors," Manufacturing & Service Operations Management, INFORMS, vol. 20(1), pages 113-129, February.
    2. Mingzhu Yu & Ruina Yang & Zelong Yi & Xuwen Cong, 2020. "Contracting in Ocean Shipping Market Under Asymmetric Information," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 37(02), pages 1-24, March.
    3. Qi Wu & Guoming Lai, 2022. "The Effects of Stock-Based Incentives on Inventory Management," Management Science, INFORMS, vol. 68(7), pages 5068-5086, July.
    4. William Schmidt & Ryan W. Buell, 2017. "Experimental Evidence of Pooling Outcomes Under Information Asymmetry," Management Science, INFORMS, vol. 63(5), pages 1586-1605, May.
    5. Daozhi Zhao & Zhibao Li, 2018. "The impact of manufacturer’s encroachment and nonlinear production cost on retailer’s information sharing decisions," Annals of Operations Research, Springer, vol. 264(1), pages 499-539, May.
    6. Li, Linqiu & Liu, Ke, 2020. "Coordination contract design for the newsvendor model," European Journal of Operational Research, Elsevier, vol. 283(1), pages 380-389.
    7. Terry A. Taylor & Erica L. Plambeck, 2007. "Simple Relational Contracts to Motivate Capacity Investment: Price Only vs. Price and Quantity," Manufacturing & Service Operations Management, INFORMS, vol. 9(1), pages 94-113, January.
    8. Lode Li & Hongtao Zhang, 2008. "Confidentiality and Information Sharing in Supply Chain Coordination," Management Science, INFORMS, vol. 54(8), pages 1467-1481, August.
    9. Chen, Xiangfeng, 2015. "A model of trade credit in a capital-constrained distribution channel," International Journal of Production Economics, Elsevier, vol. 159(C), pages 347-357.
    10. Onur Kaya & Serra Caner, 2018. "Supply chain contracts for capacity decisions under symmetric and asymmetric information," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 26(1), pages 67-92, March.
    11. Lai, Guoming & Debo, Laurens G. & Sycara, Katia, 2009. "Sharing inventory risk in supply chain: The implication of financial constraint," Omega, Elsevier, vol. 37(4), pages 811-825, August.
    12. Yang, Ruina & Yu, Mingzhu & Lee, Chung-Yee & Du, Yuquan, 2021. "Contracting in ocean transportation with empty container repositioning under asymmetric information," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 145(C).
    13. Leon Yang Chu & Noam Shamir & Hyoduk Shin, 2017. "Strategic Communication for Capacity Alignment with Pricing in a Supply Chain," Management Science, INFORMS, vol. 63(12), pages 4366-4377, December.
    14. Yun Fong Lim & Yunzeng Wang & Yue Wu, 2015. "Consignment Contracts with Revenue Sharing for a Capacitated Retailer and Multiple Manufacturers," Manufacturing & Service Operations Management, INFORMS, vol. 17(4), pages 527-537, October.
    15. Sainathan, Arvind & Groenevelt, Harry, 2019. "Vendor managed inventory contracts – coordinating the supply chain while looking from the vendor’s perspective," European Journal of Operational Research, Elsevier, vol. 272(1), pages 249-260.
    16. Daniel Granot & Shuya Yin, 2005. "On the effectiveness of returns policies in the price‐dependent newsvendor model," Naval Research Logistics (NRL), John Wiley & Sons, vol. 52(8), pages 765-779, December.
    17. Roemer, Nils & Müller, Sven & Voigt, Guido, 2023. "A choice-based optimization approach for contracting in supply chains," European Journal of Operational Research, Elsevier, vol. 305(1), pages 271-286.
    18. Chen, Kebing & Xiao, Tiaojun, 2015. "Outsourcing strategy and production disruption of supply chain with demand and capacity allocation uncertainties," International Journal of Production Economics, Elsevier, vol. 170(PA), pages 243-257.
    19. Hwan Lee, Chang & Rhee, Byong-Duk, 2010. "Coordination contracts in the presence of positive inventory financing costs," International Journal of Production Economics, Elsevier, vol. 124(2), pages 331-339, April.
    20. Mobini, Zahra & van den Heuvel, Wilco & Wagelmans, Albert, 2019. "Designing multi-period supply contracts in a two-echelon supply chain with asymmetric information," European Journal of Operational Research, Elsevier, vol. 277(2), pages 542-560.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:58:y:2012:i:10:p:1933-1951. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.