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

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  • Malitz, Ileen B

Abstract

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.

Suggested Citation

  • Malitz, Ileen B, 1989. " A Re-examination of the Wealth Expropriation Hypothesis: The Case of Captive Finance Subsidiaries," Journal of Finance, American Finance Association, vol. 44(4), pages 1039-1047, September.
  • Handle: RePEc:bla:jfinan:v:44:y:1989:i:4:p:1039-47
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    Cited by:

    1. 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.
    2. Larry H. P. Lang & Mara Faccio & Leslie Young, 2001. "Dividends and Expropriation," American Economic Review, American Economic Association, vol. 91(1), pages 54-78, March.
    3. Faccio, Mara & Lang, Larry H.P. & Leung, Joanne, 2000. "Dividends and Exploration," Working Paper Series 3917, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    4. Claessens, Stijn & Djankov, Simeon & Joseph P. H. Fan & Lang, Larry H. P., 1999. "Expropriation of minority shareholders : evidence from East Asia," Policy Research Working Paper Series 2088, The World Bank.

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