Captive Finance and Firm’s Competitiveness
University of Notre Dame - Mendoza College of Business
Michigan State University - Eli Broad Graduate School of Management; Centre for Economic Policy Research (CEPR); Gaidar Institute for Economic Policy; SITE
Purdue University - Department of Finance
March 13, 2012
We study the relationship between the formation of a captive finance subsidiary and a firm’s competitiveness. Firms with captive finance subsidiaries have higher profitability, larger market share, and lower sales volatility, keep lower cash balances, and operate under lower leverage. These results become much stronger economically after accounting for endogeneity present in the allocation of captive finance subsidiaries across firms. Following the establishment of a captive, a firm’s profitability and its industry market share gradually increase; however, it takes about four years before these improvements become statistically and economically significant. Finally, we document that stock returns of companies with captive finance subsidiaries correlate more with finance industry returns than stock returns of companies without captives. Our results indicate that a significant part of profits of the largest US industrial corporations comes from what are in essence financial services.
Number of Pages in PDF File: 35working papers series
Date posted: March 15, 2012
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