A New Measure of Insurer Franchise Value

Franchise value has been defined as “the present value of the future profits that a firm is expected to earn as a going concern” (Demsetz, Saidenberg, and Strahan, 1996), and is most often measured as Tobin’s q. It has been of particular interest in recent periods as researchers and policy makers try to understand influences on risky investment decisions. Our ability to measure it, however, is hampered by the relatively small number of insurers traded on the public market, a requirement to use Tobin’s q. To address this current limitation, we develop a franchise value measure that does not rely on stock-value-based data. Our measure incorporates eight variables representing sources of insurer franchise value. We then assess the measurement quality of the measure and compare it to the traditional market-to-book value (Tobin’s q) and two other proxies proposed by Gan (2004) and Yu, Lin, Oppenheimer, and Chen (2008). The results show that our measure significantly improves the measurement quality of franchise value compared to the other proxies.