Captive Finance and Firm’s Competitiveness

35 Pages Posted: 15 Mar 2012 Last revised: 22 Feb 2017

See all articles by Andriy Bodnaruk

Andriy Bodnaruk

University of Illinois at Chicago

William O'Brien

University of Illinois at Chicago

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management; Russian Presidential Academy of National Economy and Public Administration (RANEPA); Centre for Economic Policy Research (CEPR)

Date Written: March 13, 2012

Abstract

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

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

Andriy Bodnaruk

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

William O'Brien (Contact Author)

University of Illinois at Chicago ( email )

601 S. Morgan St.
Chicago, IL 60607
United States

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management ( email )

645 N. Shaw Lane, 321 Eppley Center
East Lansing, MI 48824-1122
United States

HOME PAGE: http://www.andreisimonov.com

Russian Presidential Academy of National Economy and Public Administration (RANEPA) ( email )

Vernadskogo Prospect 82
Moscow, 119571
Russia

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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