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Captive Finance Subsidiaries and the M-Form Hypothesis

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  • Gordon S. Roberts
  • Jerry A. Viscione

Abstract

Williamson's theory of hierarchy is used to show that the widespread and, before now, unexplained corporate practice of establishing captive finance subsidiaries may be understood as an instance of multidivisonal-form reorganization. It is argued that such reorganization enhances internal efficiency and eases the monitoring task of lenders, thus facilitating borrowing. The debt ratios of firms in five U.S. industries are examined and the evidence, while not conclusive, provides support for the hypothesis. Thinking of captive finance subsidiaries in terms of the theory of hierarchy is consistent with the rationale for finance subsidiaries presented by corporate officers.

Suggested Citation

  • 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.
    • Handle: RePEc:rje:bellje:v:12:y:1981:i:spring:p:285-295
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    Cited by:

    1. Cecil R. Dipchand & Gordon S. Roberts & Jerry A. Viscione, 1982. "Agency Costs And Captive Finance Subsidiaries In Canada," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 5(2), pages 189-199, June.
    2. Graff, Richard A. & Kairys, Jr. Joseph P., 2005. "Property Rights, Risk and Leverage," Working Papers in Economics 183, University of Gothenburg, Department of Economics.
    3. 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.
    4. Yanni Huang & Sumei Luo & Guohu Xu & Guanyou Zhou, 2018. "Quantitative Analysis and Evaluation of Enterprise Group Financial Company Efficiency in China," Sustainability, MDPI, vol. 10(9), pages 1-17, September.

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