IDEAS home Printed from https://ideas.repec.org/a/eee/corfin/v37y2016icp210-228.html
   My bibliography  Save this article

Captive finance and firm's competitiveness

Author

Listed:
  • Bodnaruk, Andriy
  • O'Brien, William
  • Simonov, Andrei

Abstract

We study the effects of establishment of a captive finance subsidiary on parent firm's competitiveness. Firms with captives have higher profitability, larger market share, lower volatility of sales, and maintain lower cash balances. Following the establishment of a captive, a firm's profitability and its industry market share gradually increase, but it takes about four years to become economically relevant. Stock returns of companies with captive finance subsidiaries correlate more with finance industry returns than stock returns of companies without captives. We estimate that captives generate about 17% of parents' net income. Thus, significant part of profits of the largest U.S. industrial corporations comes from what in essence are financial services.

Suggested Citation

  • Bodnaruk, Andriy & O'Brien, William & Simonov, Andrei, 2016. "Captive finance and firm's competitiveness," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 210-228.
    • Handle: RePEc:eee:corfin:v:37:y:2016:i:c:p:210-228
    DOI: 10.1016/j.jcorpfin.2015.12.018
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0929119915001674
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jcorpfin.2015.12.018?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Calomiris, Charles W. & Himmelberg, Charles P. & Wachtel, Paul, 1995. "Commercial paper, corporate finance, and the business cycle: a microeconomic perspective," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 203-250, June.
    2. Hund, John & Monk, Donald & Tice, Sheri, 2010. "Uncertainty about average profitability and the diversification discount," Journal of Financial Economics, Elsevier, vol. 96(3), pages 463-484, June.
    3. Michael E. Staten & John M. Barron & Andrew B. Chong, 2004. "The Emergence of Captive Finance Companies and Risk Segmentation of the Consumer Loan Market:Theory and Evidence," Econometric Society 2004 Far Eastern Meetings 584, Econometric Society.
    4. Hong, Harrison & Torous, Walter & Valkanov, Rossen, 2007. "Do industries lead stock markets?," Journal of Financial Economics, Elsevier, vol. 83(2), pages 367-396, February.
    5. James J. Heckman, 1976. "The Common Structure of Statistical Models of Truncation, Sample Selection and Limited Dependent Variables and a Simple Estimator for Such Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 4, pages 475-492, National Bureau of Economic Research, Inc.
    6. Lin, Chen & Officer, Micah S. & Zou, Hong, 2011. "Directors' and officers' liability insurance and acquisition outcomes," Journal of Financial Economics, Elsevier, vol. 102(3), pages 507-525.
    7. Kim, E Han & McConnell, John J & Greenwood, Paul R, 1977. "Capital Structure Rearrangements and Me-First Rules in an Efficient Capital Market," Journal of Finance, American Finance Association, vol. 32(3), pages 789-809, June.
    8. Villalonga, Belen & Amit, Raphael, 2006. "How do family ownership, control and management affect firm value?," Journal of Financial Economics, Elsevier, vol. 80(2), pages 385-417, May.
    9. Marcin Kacperczyk & Philipp Schnabl, 2010. "When Safe Proved Risky: Commercial Paper during the Financial Crisis of 2007-2009," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 29-50, Winter.
    10. Gordon S. Roberts & Jerry A. Viscione, 1981. "Captive Finance Subsidiaries and the M-Form Hypothesis," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 285-295, Spring.
    11. Petersen, Mitchell A & Rajan, Raghuram G, 1997. "Trade Credit: Theories and Evidence," The Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 661-691.
    12. Raymond Fisman & Inessa Love, 2003. "Trade Credit, Financial Intermediary Development, and Industry Growth," Journal of Finance, American Finance Association, vol. 58(1), pages 353-374, February.
    13. repec:bla:jfinan:v:44:y:1989:i:4:p:1039-47 is not listed on IDEAS
    14. Mike Burkart & Tore Ellingsen, 2004. "In-Kind Finance: A Theory of Trade Credit," American Economic Review, American Economic Association, vol. 94(3), pages 569-590, June.
    15. Emery, Gary W., 1987. "An Optimal Financial Response to Variable Demand," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(2), pages 209-225, June.
    16. Lauren Cohen & Andrea Frazzini, 2008. "Economic Links and Predictable Returns," Journal of Finance, American Finance Association, vol. 63(4), pages 1977-2011, August.
    17. Louis K. C. Chan & Josef Lakonishok & Theodore Sougiannis, 2001. "The Stock Market Valuation of Research and Development Expenditures," Journal of Finance, American Finance Association, vol. 56(6), pages 2431-2456, December.
    18. Heckman, James J, 1978. "Dummy Endogenous Variables in a Simultaneous Equation System," Econometrica, Econometric Society, vol. 46(4), pages 931-959, July.
    19. Hoechle, Daniel & Schmid, Markus & Walter, Ingo & Yermack, David, 2012. "How much of the diversification discount can be explained by poor corporate governance?," Journal of Financial Economics, Elsevier, vol. 103(1), pages 41-60.
    20. Lin, Chen & Ma, Yue & Malatesta, Paul & Xuan, Yuhai, 2011. "Ownership structure and the cost of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 100(1), pages 1-23, April.
    21. Harford, Jarrad, 2005. "What drives merger waves?," Journal of Financial Economics, Elsevier, vol. 77(3), pages 529-560, September.
    22. Winston, Clifford, 1993. "Economic Deregulation: Days of Reckoning for Microeconomists," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1263-1289, September.
    23. Toni M. Whited & Guojun Wu, 2006. "Financial Constraints Risk," The Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 531-559.
    24. repec:bla:jfinan:v:53:y:1998:i:3:p:845-878 is not listed on IDEAS
    25. Jose Manuel Campa & Simi Kedia, 2002. "Explaining the Diversification Discount," Journal of Finance, American Finance Association, vol. 57(4), pages 1731-1762, August.
    26. Steven N. Kaplan & Luigi Zingales, 2000. "Investment-Cash Flow Sensitivities Are Not Valid Measures of Financing Constraints," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(2), pages 707-712.
    27. Gerard Hoberg & Gordon Phillips, 2010. "Real and Financial Industry Booms and Busts," Journal of Finance, American Finance Association, vol. 65(1), pages 45-86, February.
    28. Paul H. Banner, 1958. "Competition, Credit Policies, and the Captive Finance Company," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 72(2), pages 241-258.
    29. Alexander W. Butler & Umit G. Gurun, 2012. "Educational Networks, Mutual Fund Voting Patterns, and CEO Compensation," The Review of Financial Studies, Society for Financial Studies, vol. 25(8), pages 2533-2562.
    30. Mian, Shehzad L & Smith, Clifford W, Jr, 1992. "Accounts Receivable Management Policy: Theory and Evidence," Journal of Finance, American Finance Association, vol. 47(1), pages 169-200, March.
    31. repec:bla:jfinan:v:43:y:1988:i:5:p:1127-41 is not listed on IDEAS
    32. Lawrence H. Summers, 2000. "International Financial Crises: Causes, Prevention, and Cures," American Economic Review, American Economic Association, vol. 90(2), pages 1-16, May.
    33. Michel A. Habib & D. Bruce Johnsen, 1999. "The Financing and Redeployment of Specific Assets," Journal of Finance, American Finance Association, vol. 54(2), pages 693-720, April.
    34. Gary Gorton & Matthias Kahl & Richard J. Rosen, 2009. "Eat or Be Eaten: A Theory of Mergers and Firm Size," Journal of Finance, American Finance Association, vol. 64(3), pages 1291-1344, June.
    35. Radhakrishnan Gopalan & Kangzhen Xie, 2011. "Conglomerates and Industry Distress," The Review of Financial Studies, Society for Financial Studies, vol. 24(11), pages 3642-3687.
    36. Laura Lindsey, 2008. "Blurring Firm Boundaries: The Role of Venture Capital in Strategic Alliances," Journal of Finance, American Finance Association, vol. 63(3), pages 1137-1168, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pei-Hsuan Tsai & Chih-Jou Chen & Ho-Chin Yang, 2021. "Using Porter’s Diamond Model to Assess the Competitiveness of Taiwan’s Solar Photovoltaic Industry," SAGE Open, , vol. 11(1), pages 21582440209, January.
    2. Olivier Darmouni & Andrew Sutherland, 2021. "Learning about Competitors: Evidence from SME Lending [Monthly payment targeting and the demand for maturity]," The Review of Financial Studies, Society for Financial Studies, vol. 34(5), pages 2275-2317.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Shenoy, Jaideep & Williams, Ryan, 2017. "Trade credit and the joint effects of supplier and customer financial characteristics," Journal of Financial Intermediation, Elsevier, vol. 29(C), pages 68-80.
    2. D'Mello, Ranjan & Toscano, Francesca, 2020. "Economic policy uncertainty and short-term financing: The case of trade credit," Journal of Corporate Finance, Elsevier, vol. 64(C).
    3. Albuquerque, Rui & Ramadorai, Tarun & Watugala, Sumudu W., 2015. "Trade credit and cross-country predictable firm returns," Journal of Financial Economics, Elsevier, vol. 115(3), pages 592-613.
    4. Cristina Martínez-Sola & Pedro J. García-Teruel & Pedro Martínez-Solano, 2013. "Trade credit policy and firm value," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 53(3), pages 791-808, September.
    5. Hasan, Mostafa Monzur & Habib, Ahsan, 2019. "Social capital and trade credit," International Review of Financial Analysis, Elsevier, vol. 61(C), pages 158-174.
    6. José Manuel Mansilla-Fernández & Juliette Milgram-Baleix, 2023. "Working capital management, financial constraints and exports: evidence from European and US manufacturers," Empirical Economics, Springer, vol. 64(4), pages 1769-1810, April.
    7. Altunok, Fatih & Mitchell, Karlyn & Pearce, Douglas K., 2020. "The trade credit channel and monetary policy transmission: Empirical evidence from U.S. panel data," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 226-250.
    8. Cristina Martínez Sola & Pedro J. García-Teruel & Pedro Martínez Solano, 2012. "Trade credit policy and firm value," Working Papers. Serie EC 2012-01, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    9. Wang, Meng & Goodell, John W. & Huang, Wei & Jiang, Ying, 2023. "Trade credit provision and stock price crash risk," International Review of Financial Analysis, Elsevier, vol. 90(C).
    10. Zhang, Yanlei & García Lara, Juan Manuel & Tribó, Josep A., 2020. "Unpacking the black box of trade credit to socially responsible customers," Journal of Banking & Finance, Elsevier, vol. 119(C).
    11. McGuinness, Gerard & Hogan, Teresa & Powell, Ronan, 2018. "European trade credit use and SME survival," Journal of Corporate Finance, Elsevier, vol. 49(C), pages 81-103.
    12. Goto, Shingo & Xiao, Gang & Xu, Yan, 2015. "As told by the supplier: Trade credit and the cross section of stock returns," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 296-309.
    13. El Ghoul, Sadok & Zheng, Xiaolan, 2016. "Trade credit provision and national culture," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 475-501.
    14. Yoshiro Miwa & J. Mark Ramseyer, 2005. "Trade Credit, Bank Loans, and Monitoring: Evidence from Japan," CARF F-Series CARF-F-054, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    15. Tsuruta, Daisuke & Uchida, Hirofumi, 2019. "The real driver of trade credit," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    16. Li, Tongxia & Ang, Tze Chuan ‘Chewie’ & Lu, Chun, 2023. "Employment protection and the provision of trade credit," Journal of Banking & Finance, Elsevier, vol. 155(C).
    17. Alvaro Garcia-Marin & Santiago Justel & Tim Schmidt-Eisenlohr, 2019. "Trade Credit, Markups, and Relationships," CESifo Working Paper Series 7600, CESifo.
    18. Oh, Jong-Min, 2017. "Absorptive capacity, technology spillovers, and the cross-section of stock returns," Journal of Banking & Finance, Elsevier, vol. 85(C), pages 146-164.
    19. Leora Klapper & Luc Laeven & Raghuram Rajan, 2012. "Trade Credit Contracts," The Review of Financial Studies, Society for Financial Studies, vol. 25(3), pages 838-867.
    20. James, Hui Liang & Ngo, Thanh & Wang, Hongxia, 2023. "The impact of more able managers on corporate trade credit," Journal of Behavioral and Experimental Finance, Elsevier, vol. 40(C).

    More about this item

    Keywords

    Captive finance; Competitiveness; Organizational structure; Shadow banking; Conglomerates;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:corfin:v:37:y:2016:i:c:p:210-228. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jcorpfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.