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Managerial Opportunism? Evidence from Directors' and Officers' Insurance Purchases

Author

Listed:
  • John M. R. Chalmers

    (Charles H. Lundquist College of Business, University of Oregon)

  • Larry Y. Dann

    (Charles H. Lundquist College of Business, University of Oregon)

  • Jarrad Harford

    (Charles H. Lundquist College of Business, University of Oregon)

Abstract

We analyze a sample of 72 IPO firms that went public between 1992 and 1996 for which we have detailed proprietary information about the amount and cost of D&O liability insurance. If managers of IPO firms are exploiting superior inside information, we hypothesize that the amount of insurance coverage chosen will be related to the post-offering performance of the issuing firm's shares. Consistent with the hypothesis, we find a significant negative relation between the three-year post-IPO stock price performance and the insurance coverage purchased in conjunction with the IPO. One plausible interpretation is that, like insider securities transactions, D&O insurance decisions reveal opportunistic behavior by managers. This provides some motivation to argue that disclosure of the details of D&O insurance decisions, as is required in some other countries, is valuable. Copyright The American Finance Association 2002.

Suggested Citation

  • John M. R. Chalmers & Larry Y. Dann & Jarrad Harford, 2002. "Managerial Opportunism? Evidence from Directors' and Officers' Insurance Purchases," Journal of Finance, American Finance Association, vol. 57(2), pages 609-636, April.
  • Handle: RePEc:bla:jfinan:v:57:y:2002:i:2:p:609-636
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    Cited by:

    1. Aguir, Iness & Burns, Natasha & Mansi, Sattar A. & Wald, John K., 2014. "Liability protection, director compensation, and incentives," Journal of Financial Intermediation, Elsevier, vol. 23(4), pages 570-589.
    2. Li, Kuei-Fu & Liao, Yi-Ping, 2014. "Directors' and officers' liability insurance and investment efficiency: Evidence from Taiwan," Pacific-Basin Finance Journal, Elsevier, vol. 29(C), pages 18-34.
    3. M. Martin Boyer, 2012. "Insurer Information, Insiders and Initial Public Offering," CIRANO Working Papers 2012s-30, CIRANO.
    4. Achim Wambach, 2006. "Outside-Director Liability: A Policy Analysis. Comment," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(1), pages 26-31, March.
    5. repec:eee:advacc:v:29:y:2013:i:2:p:180-185 is not listed on IDEAS
    6. M. Martin Boyer, 2003. "Is the Demand for Corporate Insurance a Habit? Evidence from Directors' and Officers' Insurance," CIRANO Working Papers 2003s-42, CIRANO.
    7. Chi, Hsin-Yi & Weng, Tzu-Ching, 2014. "Managerial legal liability and Big 4 auditor choice," Journal of Business Research, Elsevier, vol. 67(9), pages 1857-1869.
    8. Boyer, M. Martin & Stern, Léa H., 2012. "Is corporate governance risk valued? Evidence from directors' and officers' insurance," Journal of Corporate Finance, Elsevier, vol. 18(2), pages 349-372.
    9. Boyer, Martin, 2014. "Directors’ and officers’ insurance and shareholder protection," Journal of Financial Perspectives, EY Global FS Institute, vol. 2(1), pages 107-128.
    10. Gillan, Stuart L. & Panasian, Christine A., 2014. "On Litigation Risk and Disclosure Complexity: Evidence from Canadian Firms Cross-Listed in the US," The International Journal of Accounting, Elsevier, vol. 49(4), pages 426-454.
    11. Dain C. Donelson, Justin Hopkins, Christopher Yust, . "The Role of D&O Insurance in Securities Fraud Class Action Settlements," Journal of Law and Economics, University of Chicago Press, vol. 58(4).
    12. Zou, Hong & Wong, Sonia & Shum, Clement & Xiong, Jun & Yan, Jun, 2008. "Controlling-minority shareholder incentive conflicts and directors' and officers' liability insurance: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2636-2645, December.
    13. Boyer, M. Martin & Stern, Léa H., 2014. "D&O insurance and IPO performance: What can we learn from insurers?," Journal of Financial Intermediation, Elsevier, vol. 23(4), pages 504-540.
    14. Zhiyan Cao & Ganapathi Narayanamoorthy, 2005. "Accounting and Litigation Risk," Yale School of Management Working Papers amz2514, Yale School of Management, revised 01 Jul 2006.
    15. Chung, Hyeesoo H. & Wynn, Jinyoung P., 2008. "Managerial legal liability coverage and earnings conservatism," Journal of Accounting and Economics, Elsevier, vol. 46(1), pages 135-153, September.
    16. Wang, Yuwei & Chen, Chia-wei, 2016. "Directors' and officers' liability insurance and the sensitivity of directors' compensation to firm performance," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 286-297.
    17. 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.
    18. Boubakri, Narjess & Bouslimi, Lobna, 2016. "Directors’ and officers’ liability insurance and analyst forecast properties," Finance Research Letters, Elsevier, vol. 19(C), pages 22-32.
    19. Chen, Zhihong & Li, Oliver Zhen & Zou, Hong, 2016. "Directors׳ and officers׳ liability insurance and the cost of equity," Journal of Accounting and Economics, Elsevier, vol. 61(1), pages 100-120.
    20. M. Martin Boyer, 2004. "Is the Demand for Corporate Insurance a Habit? Evidence of Organizational Inertia from Directors' and Officers' Insurance," CIRANO Working Papers 2004s-33, CIRANO.
    21. Hao, (Grace) Qing, 2011. "Securities litigation, withdrawal risk and initial public offerings," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 438-456, June.
    22. Fich, Eliezer M. & Cai, Jie & Tran, Anh L., 2011. "Stock option grants to target CEOs during private merger negotiations," Journal of Financial Economics, Elsevier, vol. 101(2), pages 413-430, August.
    23. 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.
    24. 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.
    25. M. Martin Boyer & Amandine Hanon, 2009. "Protecting Directors and Officers from Liability Arising from Aggressive Earnings Management," CIRANO Working Papers 2009s-35, CIRANO.

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