Asymmetric Information, Captive Insurers' Formation, and Managers' Welfare Gain

The generally accepted argument is that captive insurance firms are synergistic because they allow tax arbitrage and other cash flow increases which would positively impact the stocks of their parent corporations. This article presents asymmetric information and wealth transfer potential as additional arguments for the creation of insurance subsidiaries. It then studies the stocks of firms that owned captive insurers around the date of incorporation of their subsidiaries. The asymmetric information hypothesis which predicts that captive formation has no effect on the value of parent firms' stocks cannot be rejected.