Essays on Empirical Corporate Finance
This dissertation consists of two essays on empirical corporate finance. The first essay, included in Chapter 1, is “Product Market Decisions and Subprime Lending by Captive Finance Companies”. I study whether companies strategically utilize captive financing, a form of providing funding to consumers, to manage product demand. Using detailed data on auto loans, I show that captive lenders alter the financing terms and lending standards throughout the product life cycle. They reduce interest rates, allow longer maturity, charge lower down payments, and relax loan standards (1) when the underlying car models become outdated; (2) when competitors release new models; and (3) when they experience exogenous shocks such as recalls. While the lower interest rates offered by captive lenders reduce the likelihood of consumer default in the short term, the average default rate eventually increases in the long horizon because captive lenders’ willingness to dispense higher-risk loans allows more subprime borrowers to access credit. For consumers who cannot find a loan from non-captive lenders, borrowing from captive lenders help them in purchasing a car, but they could potentially be approved for a loan they cannot afford. These findings collectively suggest that captive financing is a tool manufacturers use to boost car sales throughout the product life cycle, while this tool could induce overleveraging by consumers. The second essay, included in Chapter 2, is “Franchising Dreams: Corporate Expansion and Local Growth”. It is a joint work with Umit Gurun and Steven Xiao. In this study, we investigate franchising strategies by constructing a comprehensive dataset of franchise establishments. We find that companies tend to franchise their stores in new, remote, and rural markets. Moreover, while local franchisee investments predict future local house price growth, franchisor investments do not, suggesting that franchisees have information about the economic prospects of local markets. The proportion of establishments directly invested by franchisors increases over time if existing establishments perform well, and the follower establishments tend to perform better than the pioneer establishments. These findings collectively suggest that companies use franchising as an information-production tool for geographic expansion.