35 Pages Posted: 15 Mar 2012 Last revised: 22 Feb 2017
Date Written: 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.
Suggested Citation: Suggested Citation
Bodnaruk, Andriy and O'Brien, William and Simonov, Andrei, Captive Finance and Firm’s Competitiveness (March 13, 2012). Available at SSRN: https://ssrn.com/abstract=2021503 or http://dx.doi.org/10.2139/ssrn.2021503