Recently, the paper Advance Selling to Ease Financial Distress ,co-authored by Associate Professor Xiao Shuang (corresponding author) from the School of Finance, along with collaborators, has been published online in the internationally recognized top-tier management journal Management Science. This marks another breakthrough for our faculty in publishing in an international top journal, following the online publication of papers by Professor Kong Dongmin and Associate Li Professor Zhao in Management Science.

Abstract

Left unable to provide service during the COVID-19 pandemic, many small businesses have experimented with alternative ways of generating income. One approach that has gained traction is the use of advance selling, whereby the firm asks consumers in its local community to support the business by paying in advance for consumption at a future date. In this paper, we develop a game theoretic model to investigate whether and how advance selling schemes can be successfully implemented by firms facing financial distress. In cases of high distress (i.e., where obtaining bank financing is infeasible given the firm’s financial need), we show that advance selling in its classic implementation can help the firm secure its survival in some scenarios but may suffer from significant inefficiencies associated with strategic consumer behavior and firm moral hazard. We demonstrate that two modifications of the classic scheme currently observed in practice—namely, (i) the introduction of an “all-or-nothing” clause and (ii) selling future discount coupons as opposed to the full service—can expand the set of scenarios in which survival is ensured while also allowing the firm to extract higher profit. In cases of moderate financial distress (i.e., where bank financing is a feasible but inefficient option), we find that simple advance selling schemes typically fail to make an impact. However, we show that a more complex scheme, combining both of the aforementioned modifications simultaneously, can be used in conjunction with bank financing to generate a substantial improvement in firm profit.

Teacher Profile

Shuang Xiao, an associate professor and master's supervisor at the Department of Finance, School of Finance, Zhongnan University of Economics and Law, has achieved remarkable success in the fields of supply chain finance, the intersection of finance and operations research, and financial technology. Her latest research, Advance Selling to Ease Financial Distress, has been successfully published in the internationally renowned journal Management Science. Professor Xiao has published numerous high-quality academic papers in well-known domestic and international academic journals, covering various fields such as corporate finance, supply chain finance, and financial engineering. She has led and participated in several national research projects, including the National Natural Science Foundation of China's Young Scientists Fund and General Program. She also serves as a anonymous peer reviewer for international academic journals such as Omega-International Journal of Management Science, Transportation Research Part E: Logistics and Transportation Review, IEEE Transactions on Engineering Management, Finance Research Letters, and International Transactions in Operational Research.