STRATEGY SELECTION OF INVENTORY FINANCING BASED ON OVERCONFIDENT RETAILER

Abstract

Overconfidence of financing enterprises in market demand will have a significant impact on their business decision-making and banks’ decisionmaking. This paper constructs the demand function based on the retailer’s overconfidence and establishes the profit functions of the retailer and the bank respectively. Through Stackelberg game analysis, the influence of the retailer’s overconfidence on each decision variable can be analyzed. The study has the following findings. Firstly, overconfidence makes decision-making deviate from rational decision-making. Secondly, the relationship between loan-to-value ratio and overconfidence is affected by different factors when the banks know the market or do not understand the market. Thirdly, the relationship between retailer’s default probability and overconfidence is different when the bank doesn’t know the market or knows the market. Fourthly, when the bank does not understand the market but listen to the overconfident retailer’s market analysis, he should choose fixed loan-to-value ratio for financing. The overconfident retailer can ask the bank to give a higher loan-to-value ratio to reduce the capital pressure. Fifthly, when the bank conducts market research, the bank should choose the variable loan-to-value ratio contract for financing, while the retailer only needs to make decisions according to the bank’s lending strategy