Operations, regulations, and financial frictions

Chen, Christopher (2019) Operations, regulations, and financial frictions. Doctoral thesis, University of London: London Business School.

Abstract

Regulations often have effects that are unanticipated by policymakers due to financial frictions impacting firms' operational decisions. Financial frictions, and their associated costs, can significantly alter the trade-offs that managers face, leading to unintended consequences of regulation for both firms and consumers. This thesis, which consists of two chapters, presents two empirical studies of such unintended effects in healthcare and supply chain settings. In the first chapter, we examine the impact of the Hospital Readmissions Reduction Program (HRRP), which imposes penalties on hospitals that exhibit higher than average 30-day risk-adjusted readmission rates, on hospitals' admission decisions. We find that hospitals with greater exposure to penalties, especially those that were also financially constrained, significantly increased their observation admissions after program announcement. Doing so allows patients to receive hospital-level care without counting towards HRRP statistics. A back-of-the-envelope calculation suggests that after adjusting for observation admissions, the improvement in average readmissions due to the program is actually much less than reported. The second study examines the impact of recent government policies regulating the practice of trade credit. While limiting the length of payment periods was intended to improve the financial sustainability of suppliers, enacting these policies may also limit the operational roles of trade credit in supply chain interactions between financially constrained firms. Exploiting a natural experiment due to legislation, we find that reducing trade credit causes downstream buyers to significantly reduce their inventory stocking levels, which also leads to potential reductions in firm profits and fill rates. The results show that trade credit is an indispensable financing source for inventory, and limiting it would negatively impact supply chain efficiency and consumer welfare.