Operational Decisions, Capital Structure, and Managerial Compensation: A News Vendor Perspective

While firm growth critically depends on financing ability and access to external capital, the operations management literature seldom considers the effects of financial constraints on the firms’ operational decisions. Another critical assumption in traditional operations models is that corporate managers always act in the firm owners’ best interests. Managers are, however, agents of the owners of the company, whose interests are often not aligned with those of equity-holders or debt-holders; hence, managers may make major decisions that are suboptimal from the firm owners’ point of view. This paper builds on a news vendor model to make optimal production decisions in the presence of financial constraints and managerial incentives. We explore the relationship ∗This work was supported in part by the National Science Foundation under Grant DMI-0100462. The second author is also grateful for the support of the University of Chicago Graduate School of Business.