A Re-examination of the Wealth Expropriation Hypothesis: The Case of Captive Finance Subsidiaries
This paper reexamines E. Han Kim, John J. McConnell, and P. Greenwood's (1977) study of captive finance subsidiaries. The author suggests 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 for fourteen firms with publicly-traded debt, she computes and tests the statistical significance of abnormal returns to shareholders, bondholders, and the firm when captives are incorporated. She finds that shareholders gain 14.9 percent, bondholders lose 2.3 percent, and firm value increases a significant 10.4 percent. The results are inconsistent with wealth expropriations and lend support to the importance of reputation to firms. Copyright 1989 by American Finance Association.
Volume (Year): 44 (1989)
Issue (Month): 4 (September)
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