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

  • 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)

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.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 57 (2002)
Issue (Month): 2 (04)
Pages: 609-636

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Handle: RePEc:bla:jfinan:v:57:y:2002:i:2:p:609-636
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