Trade Credit Provision and Strategic Use of Captive Finance Subsidiaries

52 Pages Posted: 27 Jul 2023 Last revised: 7 Dec 2023

See all articles by Mostafa Aghasian

Mostafa Aghasian

Université Paris Dauphine - PSL Research University

Date Written: December 1, 2022

Abstract

Captive finances are financial arms of large manufacturing and retailing firms, aiding their parents' sales by providing long-term loans to customers. However, a significant portion of their lending activities is directed towards independent vendors who operate under franchise agreements with the parent firms. In this study, we construct a comprehensive sample of firms with captive finance arms, allowing for a simultaneous examination of trade credit and bank credit provision by both parent firms and their subsidiaries. This unique framework in the credit literature enables us to investigate the impact of long-term credit monitoring by captive subsidiaries on the parent's short-term credit provision for almost homogeneous collaterals. Our results indicate that parent firms strategically employ trade credit provision as a means to leverage the vendors' network, extending greater short-term trade credit to vendors demonstrating superior long-term loan performance. Furthermore, we assess various factors related to captive finance subsidiaries, including their size, lending activity, and loan portfolio risk parameters. The findings demonstrate a positive relationship between the size and activity of captive finance subsidiaries and the trade credit provision of parent companies. Additionally, a strong correlation is observed between the favorable performance of captive finance loans and the extent of trade credit provision.

Keywords: Trade credit; trade credit risk management; captive finance; consumer loan market.

JEL Classification: G23, G32, D82, L62

Suggested Citation

Aghasian, Mostafa, Trade Credit Provision and Strategic Use of Captive Finance Subsidiaries (December 1, 2022). Université Paris-Dauphine Research Paper No. 4517691, Available at SSRN: https://ssrn.com/abstract=4517691 or http://dx.doi.org/10.2139/ssrn.4517691

Mostafa Aghasian (Contact Author)

Université Paris Dauphine - PSL Research University ( email )

Place du Maréchal de Lattre de Tassigny
Paris cedex 16, 75775
France

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