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Managerial legal liability coverage and earnings conservatism

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  • Chung, Hyeesoo H.
  • Wynn, Jinyoung P.
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    Abstract

    This paper examines the effect of managerial legal liability coverage on earnings conservatism. Using directors' and officers' (D&O) liability insurance coverage and cash for indemnification as a proxy for managerial legal liability coverage, we find that the higher the managerial liability coverage, which reduces the expected legal liability of managers, the less conservative the firm's earnings. We also find that managerial legal liability coverage has a stronger influence on earnings conservatism in a legal regime with higher litigation risk. Our results are consistent with the threat of litigation conditioning managers to practice conservative accounting.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 46 (2008)
    Issue (Month): 1 (September)
    Pages: 135-153

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    Handle: RePEc:eee:jaecon:v:46:y:2008:i:1:p:135-153

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

    Related research

    Keywords: Legal liability D& O liability insurance Indemnification Earnings conservatism;

    References

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    Cited by:
    1. Ramalingegowda, Santhosh & Yu, Yong, 2012. "Institutional ownership and conservatism," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 98-114.
    2. Ishida, Souhei & Ito, Kunio, 2013. "The Effect of Accounting Conservatism on Corporate Investment Behavior," Working Paper Series 175, Center for Japanese Business Studies (HJBS), Graduate School of Commerce and Management Hitotsubashi University.
    3. Ettredge, Michael & Huang, Ying & Zhang, Weining, 2012. "Earnings restatements and differential timeliness of accounting conservatism," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 489-503.
    4. M. Martin Boyer & Amandine Hanon, 2009. "Protecting Directors and Officers from Liability Arising from Aggressive Earnings Management," CIRANO Working Papers 2009s-35, CIRANO.
    5. 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.
    6. Lin, Chen & Officer, Micah S. & Zou, Hong, 2011. "Directors' and officers' liability insurance and acquisition outcomes," Journal of Financial Economics, Elsevier, vol. 102(3), pages 507-525.
    7. Jerry Sun & Guoping Liu, 2011. "The effect of analyst coverage on accounting conservatism," Managerial Finance, Emerald Group Publishing, vol. 37(1), pages 5-20, January.
    8. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.

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