We study the relation between operating flexibility and the borrowing costs incurred by a firm financing inventory investments with debt. We find that flexibility in replenishing or liquidating inventory, by providing risk shifting incentives, could lead to borrowing costs that erase more than a...

Resource flexibility, arguably among the most celebrated operational concepts, is known to provide firms facing demand uncertainty with such benefits as risk pooling, revenue-maximization optionality, and operational hedging. In this article we uncover a heretofore unknown benefit: we establish...