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The role of information: When is Directors’ and Officers’ insurance value-added?

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  • Chang, Shih-Chung
  • Ren, Yayuan
  • Yeh, Jason

Abstract

The paper presents a model of shareholders' decisions to purchase Directors' and Officers' liability insurance (D&O insurance) for their directors. We consider the tradeoff between the governance enhancing effect and the moral hazard effect of D&O insurance and focus on the role of information in determining the optimal level of D&O insurance purchase. The model shows that when directors are well informed, the governance enhancing effect of D&O insurance dominates the moral hazard effect, and thus, D&O insurance adds value to the firm. When directors are under-informed, the best strategy for shareholders is not to provide D&O insurance for directors. The model further shows that the optimal level of D&O insurance, when it exists, increases in the quality of the information received by directors. These results imply cross-firm variations in D&O insurance purchase.

Suggested Citation

  • Chang, Shih-Chung & Ren, Yayuan & Yeh, Jason, 2018. "The role of information: When is Directors’ and Officers’ insurance value-added?," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 189-197.
    • Handle: RePEc:eee:jbfina:v:97:y:2018:i:c:p:189-197
    DOI: 10.1016/j.jbankfin.2018.10.003
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    References listed on IDEAS

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    Cited by:

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    3. Lin, Feng-Yi & Guan, Liming & Ho, Chia-Ling & Wang, Teng-Shih, 2022. "Examining the D&O insurance effect on managerial ability," Finance Research Letters, Elsevier, vol. 46(PA).

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    More about this item

    Keywords

    Directors and Officers insurance; Information quality; Corporate governance;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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