The impact of a captive insurance company's formation on a firm's value after the carnation case |
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| Affiliation: | 1. Department of Marketing, Otago Business School, University of Otago, Dunedin 9054, New Zealand;2. Department of Marketing, Monash Business School, Faculty of Business and Economics, Monash University, Australia;3. School of Economics, Finance and Marketing, RMIT University, Australia;1. INCAE Business School, Apartado 960, 4050 Alajuela, Costa Rica;2. CINDE, Apartado 178, 1255 Escazú, Costa Rica;1. Price College of Business, University of Oklahoma, Norman, OK 73069, United States;2. Goizueta Business School, Emory University, Atlanta, GA 30322-2710, United States |
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| Abstract: | One of the primary reasons previously cited for forming a captive insurance company is tax advantages based on premium deductibility. The IRS ruling in the Carnation Company case was the first time that investors experienced a decisive legal action signaling the possibility that premiums paid to captives might not be tax deductible to the parent company. The purpose of this paper is to determine if the investor's perceived lack of tax deductibility of premiums, based upon the Carnation case, has an impact upon the parent firm's value at time of captive formation. The results indicate that the market placed a high value on the ability of the parent company to deduct for tax purposes the insurance premium paid to its captive. Before the Carnation case there was a positive reaction by the market to captive formation whereas after the Carnation case, there was a negative reaction. |
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