Does Organizational Structure Affect Firm Strategy and Performance? Evidence from Consumer Automobile Leasing∗

Why do manufacturer-owned car lessors lose so much money on leases, despite having proprietary information unavailable to other lessors? This paper explores how conflicts in organizational focus within vertically integrated firms can hurt subsidiary performance. To examine this, I identify the differences between the reaction of the captive leasing subsidiaries of automobile manufacturers to product and market characteristics and the reaction of their independent leasing competitors. While independent lessors write contracts that reflect risk from obsolescence and durability concerns, captives clearly pursue a second agenda from their corporate parents—the use of lease subsidization to sell unwanted vehicles. And while intentional lease subsidization may ultimately benefit the manufacturer, the organizational focus of car manufacturers on sales and market share has the additional effect of hindering the captive subsidiary’s ability to account for risk in lease contracts even when subsidization is unnecessary. I find evidence that unlike their independent competitors, captive lessors fail to adjust lease terms to variation in the durability of their vehicles. This is consistent with evidence from field research that product sales teams and executives pressure captive lessors to support vehicles with favorable lease terms, despite product quality or viability concerns. I also find evidence that captive lessors may benefit from proprietary information about the timing of new model introductions. This paper suggests that accurate forecasting is only half the battle for subsidiaries. Subsidiaries with accurate forecasts may be unable to implement this knowledge when it conflicts with the goals or focus of the corporate parent.