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- Title
Do Captive Insurance Subsidiaries Improve Cash Flow? Evidence from Nasdaq-100 Companies.
- Authors
Jiun-Lin Chen; Mu-Sheng "Shane" Chang; Weston, Harold; Russell, David
- Abstract
This study examines the impact of establishing a captive insurance subsidiary on its parent company's cash flow, using a sample of the 2020 Nasdaq-100 index constituents. This index stands out due to its composition of large-cap, non-financial, and technology-oriented stocks. Forming a captive is different from buying commercial insurance from the standpoints of risk retention and risk transfer, while the efficiency of risk management via captives suggests they have the potential to improve cash flow. Three crucial insights emerge. First, a captive structure is not commonly implemented by Nasdaq-100 companies, as only 15 of them form captives, in contrast to around a third of S&P 500 companies. Second, our multivariate analysis finds no positive relationship between captive formations and cash flow ratios over the entire sample period 1995-2020. This implies that the formation of a captive does not necessarily lead to higher cash flow. Third, our disaggregated datasets reveal that a captive vehicle conditionally improves cash flow when its parent is a relatively young publicly traded entity, carries higher cash holdings, or is affiliated with Consumer Staples, Information Technology, and Communication Services. In addition, our work shows a positive link between captive utilization and cash flow during the post-financial crisis period 2009-2020, an outcome that reflects changes in captive operations following the financial crisis.
- Subjects
CASH flow; FINANCIAL crises; BUSINESS enterprises; INFORMATION technology; RISK retention; CAPTIVE insurance companies
- Publication
Southern Business & Economic Journal, 2021, Vol 44, Issue 2, p1
- ISSN
0743-779X
- Publication type
Article