Competition under financial distress

This paper presents a link between product market competition and the financial situation - in particular asset composition - of firms, based on capital market imperfections. Consistent with the popular view, the model shows that firms under financial distress use aggressive pricing to generate cash. Firms resort to aggressive pricing in order to reshape their asset composition between non-liquid and liquid assets when new information renders their current composition non-optimal. In contrast to the vast literature on inventories that has given little attention to pricing, the model links pricing and inventory behavior. Low pricing is used as a source of internal funding.