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Insurers and Lenders as Monitors During Securities Litigation: Evidence from D&O Insurance Premiums, Interest Rates, and Litigation Costs

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  • Dain C. Donelson
  • Christopher G. Yust

Abstract

This study examines whether directors’ and officers’ insurers and lenders effectively monitor securities litigation and respond through pricing before case outcomes are known. By “monitoring,” we refer to tracking case progress and obtaining information from the insured (defendant) firm and its counsel prior to case resolution. We find that insurers and lenders increase rates, and that this effect is almost completely isolated to firms with cases that eventually settle. We confirm that this response is reasonable as settled cases are associated with lower future earnings, while there is generally no relation between future earnings and dismissed cases. As direct costs appear low, our results suggest that most costs are indirect in the form of reputational damage. Overall, our results suggest that researchers and policymakers interested in litigation should focus on settled cases, which are the only cases with material long‐term costs.

Suggested Citation

  • Dain C. Donelson & Christopher G. Yust, 2019. "Insurers and Lenders as Monitors During Securities Litigation: Evidence from D&O Insurance Premiums, Interest Rates, and Litigation Costs," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 86(3), pages 663-696, September.
    • Handle: RePEc:bla:jrinsu:v:86:y:2019:i:3:p:663-696
    DOI: 10.1111/jori.12231
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    Cited by:

    1. Dain C. Donelson & Jennifer L. Glenn & Christopher G. Yust, 2022. "Is tax aggressiveness associated with tax litigation risk? Evidence from D&O Insurance," Review of Accounting Studies, Springer, vol. 27(2), pages 519-569, June.
    2. Eldar Maksymov & Jeffrey Pickerd & D. Jordan Lowe & Mark E. Peecher & Andrew Reffett & Dain C. Donelson, 2020. "The Settlement Norm in Audit Legal Disputes: Insights from Prominent Attorneys$," Contemporary Accounting Research, John Wiley & Sons, vol. 37(3), pages 1400-1443, September.
    3. Chen, Feng & Hou, Yu & Qiu, Jiaping & Richardson, Gordon, 2023. "Chilling effects of patent trolls," Research Policy, Elsevier, vol. 52(3).
    4. Allen Huang & Kai Wai Hui & Reeyarn Zhiyang Li, 2019. "Federal Judge Ideology: A New Measure of Ex Ante Litigation Risk," Journal of Accounting Research, Wiley Blackwell, vol. 57(2), pages 431-489, May.

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