Who Finances Durable Goods and Why it Matters: Captive Finance and the Coase Conjecture

83 Pages Posted: 26 May 2016 Last revised: 15 Jun 2018

Justin Murfin

Yale University - School of Management

Ryan Pratt

Brigham Young University

Date Written: February 1, 2018

Abstract

We propose that, by financing their own product sales through captive finance subsidiaries, durable goods manufacturers commit to higher resale values for their products in future periods. Using data on captive financing by the manufacturers of heavy equipment, we find that captive backed models have lower price depreciation. The evidence is consistent with captive finance helping manufacturers commit to ex-post actions that support used machine prices. This, in turn, conveys higher pledgeability for captive backed products, even for individual machines financed by banks. Although motivated as a rent seeking device, captive financing generates positive spillovers by relaxing credit constraints.

Keywords: Captive Finance, Vendor Finance, Trade Credit, Durable Goods, Limited Commitement, Time-inconsistency, Asymmetric Information

JEL Classification: G20, G23

Suggested Citation

Murfin, Justin and Pratt, Ryan, Who Finances Durable Goods and Why it Matters: Captive Finance and the Coase Conjecture (February 1, 2018). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2784519 or http://dx.doi.org/10.2139/ssrn.2784519

Justin Murfin

Yale University - School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Ryan Pratt (Contact Author)

Brigham Young University ( email )

640 TNRB
Provo, UT 84602
United States
(801) 422-1222 (Phone)

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