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What drives corporate insurance demand? Evidence from directors' and officers' liability insurance in Korea

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  • Park, Min

Abstract

This paper provides empirical evidence that increasing risk results in higher demand for hedging among firms. Through a natural experiment exploring the Korean Government's legislative change on shareholder class action, I show that firms increase the liability insurance coverage for their directors and officers in response to increased litigation risk, despite the increase in costs associated with buying further coverage. I further test the heterogeneous effects in two dimensions of corporations: industry classification, and type of shareholder-management relationship. The results confirm that firms in high litigation risk industries and those with high agency conflicts between shareholders and management increase their insurance coverage relatively more. Overall, the results demonstrate that corporations adjust their hedging demand in response to changing risk environment and that the adjustment depends on the level of risk exposure of individual firms.

Suggested Citation

  • Park, Min, 2018. "What drives corporate insurance demand? Evidence from directors' and officers' liability insurance in Korea," Journal of Corporate Finance, Elsevier, vol. 51(C), pages 235-257.
    • Handle: RePEc:eee:corfin:v:51:y:2018:i:c:p:235-257
    DOI: 10.1016/j.jcorpfin.2018.06.005
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    References listed on IDEAS

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    Cited by:

    1. Chiang, Yao-Min & Chang, Pang-Ru, 2022. "Overinvestment, ownership structure, and directors' and officers’ liability insurance," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 38-50.
    2. Kong, Xiaoran & Xu, Siping & Liu, Ming-Yu & Ho, Kung-Cheng, 2023. "Confucianism and D&O insurance demand of Chinese listed companies," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    3. Jia, Ning & Mao, Xinshu & Yuan, Rongli, 2019. "Political connections and directors' and officers' liability insurance – Evidence from China," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 353-372.
    4. Tommaso Oliviero & Min Park & Hong Zou, 2021. "Liquidity Effects of Litigation Risk: Evidence from a Legal Shock," CSEF Working Papers 623, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 21 Jan 2023.

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    More about this item

    Keywords

    Corporate insurance demand; D&O insurance; Shareholder class action; Law change;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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