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Captive finance and firm's competitiveness

Andriy Bodnaruk, William O'Brien and Andrei Simonov

Journal of Corporate Finance, 2016, vol. 37, issue C, 210-228

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.

Keywords: Captive finance; Competitiveness; Organizational structure; Shadow banking; Conglomerates (search for similar items in EconPapers)
JEL-codes: G23 G32 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1016/j.jcorpfin.2015.12.018

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