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Is corporate governance risk valued? Evidence from directors' and officers' insurance

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Author Info

  • Boyer, M. Martin
  • Stern, Léa H.

Abstract

We find that common equity firms pay lower D&O insurance premiums than income trusts, an alternative and riskier ownership form. This result has wide-ranging implications for investors insofar as the information provided by D&O insurers provides investors with an unbiased signal of the firm's governance risk. The signal is unbiased because it comes from an entity (i.e. the insurer) that has a direct financial incentive to correctly assess an organization's governance risk, in contrast to other ad hoc governance measures and indices.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 18 (2012)
Issue (Month): 2 ()
Pages: 349-372

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Handle: RePEc:eee:corfin:v:18:y:2012:i:2:p:349-372

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Web page: http://www.elsevier.com/locate/jcorpfin

Related research

Keywords: Corporate governance; D&O insurance; Initial public offerings; Income trusts;

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References

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  1. Bhagat, Sanjai & Bolton, Brian, 2008. "Corporate governance and firm performance," Journal of Corporate Finance, Elsevier, vol. 14(3), pages 257-273, June.
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  3. Michael R. King, 2003. "Income Trusts--Understanding the Issues," Working Papers 03-25, Bank of Canada.
  4. Core, John E, 2000. "The Directors' and Officers' Insurance Premium: An Outside Assessment of the Quality of Corporate Governance," Journal of Law, Economics and Organization, Oxford University Press, vol. 16(2), pages 449-77, October.
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  9. Adams, Renee & Hermalin, Benjamin E. & Weisbach, Michael S., 2009. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," Working Paper Series 2008-21, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  10. Bradley, Michael & Chen, Dong, 2011. "Corporate governance and the cost of debt: Evidence from director limited liability and indemnification provisions," Journal of Corporate Finance, Elsevier, vol. 17(1), pages 83-107, February.
  11. McTier, Brian C. & Wald, John K., 2011. "The causes and consequences of securities class action litigation," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 649-665, June.
  12. M. Martin Boyer, 2003. "Directors' and Officers' Insurance and Shareholders' Protection," CIRANO Working Papers 2003s-64, CIRANO.
  13. James S. Linck & Jeffry M. Netter & Tina Yang, 2009. "The Effects and Unintended Consequences of the Sarbanes-Oxley Act on the Supply and Demand for Directors," Review of Financial Studies, Society for Financial Studies, vol. 22(8), pages 3287-3328, August.
  14. Newey, Whitney K., 1987. "Efficient estimation of limited dependent variable models with endogenous explanatory variables," Journal of Econometrics, Elsevier, vol. 36(3), pages 231-250, November.
  15. Ritter, Jay R., 1987. "The costs of going public," Journal of Financial Economics, Elsevier, vol. 19(2), pages 269-281, December.
  16. Lucian Bebchuk & Alma Cohen & Allen Ferrell, 2009. "What Matters in Corporate Governance?," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 783-827, February.
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Citations

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Cited by:
  1. Lin, Chen & Officer, Micah S. & Wang, Rui & Zou, Hong, 2013. "Directors' and officers' liability insurance and loan spreads," Journal of Financial Economics, Elsevier, vol. 110(1), pages 37-60.
  2. M. Martin Boyer, 2012. "Insurer Information, Insiders and Initial Public Offering," CIRANO Working Papers 2012s-30, CIRANO.

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