Financial and Governance Aspects of Firms as Drivers of Captive Insurance Usage

This article examines the effects of captive insurance usage on firm borrowing costs, marginal tax rates, dividend payouts and investments in intangible asset development. Using a panel dataset from 2009 to 2022, we find that firms using captive insurance benefit from decreased borrowing costs and marginal tax rates, as well as from its association with increased dividend payments and greater levels of investment in intangible asset development. Our results hold when considering the ex-post and ex-ante situations of firms adopting captive insurance structures. Firms with higher levels of holdings by insiders and institutional blockholders are more likely to use captive insurance, as are firms with higher levels of total executive compensation and higher proportions of stock-based compensation. However, firms with higher proportions of options-based compensation are less likely to use captive insurance. Comparisons across financial and governance models indicate that the relationship between captive insurance usage and governance variables is stronger than the relationship between captive insurance usage and financial variables.