Who Finances Durable Goods and Why it Matters: Captive Finance and the Coase Conjecture∗

We propose that, by financing their own product sales through captive finance subsidiaries, durable goods manufacturers commit to higher resale values for their products in future periods. Using data on captive financing by the manufacturers of heavy equipment, we find that captive backed models have lower price depreciation. The evidence is consistent with captive finance helping manufacturers commit to ex-post actions that support used machine prices. This, in turn, conveys higher pledgeability for captive backed products, even for individual machines financed by banks. Although motivated as a rent seeking device, captive financing generates positive spillovers by relaxing credit constraints. ∗Correspondence: Murfin: [email protected], (203)436-0666. Pratt: [email protected], (801)422-1222. This paper was formerly titled “Captive Finance and the Coase Conjecture.” We thank Jean-Noel Barrot, Tanakorn Makaew, Rich Matthews, Ralf Meisenzahl, Rodney Ramcharan, Adriano Rampini, seminar participants at Yale School of Management, BYU economics and finance departments, Southern Methodist University, University of Rochester, Ohio State, Drexel, Tulane, Colorado University, University of Pittsburgh, University of Illinois, the Federal Reserve Bank of Philadelphia, Dartmouth Tuck, MIT Sloan, Temple University, the University of South Carolina, and conference participants at Red Rock Finance Conference, Olin Corporate Finance Conference, Financial Research Association Annual Meeting, Northern Finance Association Conference, and American Finance Association Annual Meeting.