Credit Fire Sales: Captive Lending as Liquidity in Distress
65 Pages Posted: 18 Feb 2021 Last revised: 22 Apr 2021
Date Written: April 21, 2021
We study the role of captive finance in the car loan market when manufacturers' liquidity demand increases. Using a new multi-country dataset on securitized car loans, we show that captive lending enables a liquidity constrained integrated manufacturer to increase the cash collected from car sales via a credit fire sale: reducing loan-to-value in the intensive margin and relaxing lending standards in the extensive margin increases car sale down-payments, at the cost of future losses. We exploit quasi-exogenous variation in manufacturers' liquidity cost and need following the Volkswagen emissions scandal to identify the channel. A simple calibrated model shows that a standalone manufacturer would have to decrease car prices by 10% to generate the same liquidity of a credit fire sale.
Keywords: captive finance, fire sales, car loans, vertical integration, liquidity, distress
JEL Classification: G20, G21, G23, G51
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