A Re-Examination of the Wealth Expropriation Hypothesis: The Case of Captive Finance Subsidiaries



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    • Department of Finance, University of Illinois at Chicago. The author wishes to thank Richard Cohn, Gailen Hite, George Kanatas, John McConnell, Paul Schultz, and the anonymous referee for their helpful comments and suggestions. A previous version of the paper was presented at the 1986 Western Finance Association Meetings.


This paper re-examines Kim, McConnell, and Greenwood's (1977) study of captive finance subsidiaries. We suggest that, as long as firms are concerned with reputation, shareholders will find it costly to engage in deliberate wealth expropriation and thus have no incentives to do so. Using a sample of fourteen firms with publicly traded debt, we compute and test the statistical significance of abnormal returns to shareholders, bondholders, and the firm when captives are incorporated. We find that shareholders gain 14.9 percent, bondholders lose 2.3 percent, and firm value increases a significant 10.4 percent. Our results are inconsistent with wealth expropriation and lend support to the importance of reputation to firms.