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.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
