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A Re‐Examination of the Wealth Expropriation Hypothesis: The Case of Captive Finance Subsidiaries
Author(s) -
MALITZ ILEEN B.
Publication year - 1989
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1989.tb02637.x
Subject(s) - expropriation , shareholder , reputation , debt , subsidiary , incentive , business , sample (material) , monetary economics , economics , finance , financial economics , corporate governance , accounting , microeconomics , market economy , law , chemistry , chromatography , political science , multinational corporation
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.