Abstract
This paper examines the stock market impact of captive insurance subsidiary formation on parent companies in the United Kingdom (UK) corporate sector. We report that the formation of an insurance captive has no effect on the financial, systematic and unsystematic risks of the parent company, irrespective of the parent's market capitalisation. In addition, there is weak evidence that the market has a negative view of the captive insurance decision. Finally, our results indicate that financial risk, agency costs of free cash flow, asymmetric information and market power have no effect on the stock market's reaction to the captive formation decision.
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