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AGENCY COSTS AND CAPTIVE FINANCE SUBSIDIARIES IN CANADA
Author(s) -
Dipchand Cecil R.,
Roberts Gordon S.,
Viscione Jerry A.
Publication year - 1982
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1982.tb00060.x
Subject(s) - subsidiary , agency (philosophy) , agency cost , debt , business , principal–agent problem , finance , debt financing , accounting , economics , corporate governance , philosophy , epistemology , multinational corporation , shareholder
Agency theory is employed to formalize the intuitive rationale for the widespread practice of setting up captive finance subsidiaries: reduced agency costs of debt increase the firm's consolidated debt capacity. Of the two Canadian industries tested, firms forming captives had significantly higher use of debt in manufacturing but failed to show any significant difference for merchandising. In light of confounding influences from tax‐clientele effects, size difference, and support in tests on U.S. firms, the mixed finding should encourage further testing. The outcome of these tests suggests that it is potentially useful to think of captive finance subsidiaries in light of agency theory.