Acquisitions and Regulatory Arbitrage by Captive Finance Companies

Abstract

Captive finance firms play an important role as financial intermediaries. Yet, they receive little attention in financial research. Recently, finance companies have grown by engaging in acquisition activities. Given their unique characteristics, finance companies may be more capable of extracting gains from acquisitions than other firms. We explain their advantages, and assess the market response and long-term valuation of finance companies that engage in acquisitions. Our results indicate that acquisitions by captive finance firms are wealth enhancing in the short term and the long term. However, the market reacts negatively when flexible captive financing firms acquire highly regulated depository institutions.