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Is corporate governance risk valued? Evidence from directors' and officers' insurance

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  • Boyer, M. Martin
  • Stern, Léa H.

Abstract

We find that common equity firms pay lower D&O insurance premiums than income trusts, an alternative and riskier ownership form. This result has wide-ranging implications for investors insofar as the information provided by D&O insurers provides investors with an unbiased signal of the firm's governance risk. The signal is unbiased because it comes from an entity (i.e. the insurer) that has a direct financial incentive to correctly assess an organization's governance risk, in contrast to other ad hoc governance measures and indices.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:corfin:v:18:y:2012:i:2:p:349-372
    DOI: 10.1016/j.jcorpfin.2011.12.005
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    References listed on IDEAS

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    1. Lucian A. Bebchuk & Michael S. Weisbach, 2010. "The State of Corporate Governance Research," Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 939-961, March.
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    12. 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.
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    Citations

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    Cited by:

    1. Stephen G. Fier & Andre P. Liebenberg, 2014. "The Market for Directors’ and Officers’ Insurance," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 17(2), pages 215-239, September.
    2. Stephen G. Fier & Kathleen A. McCullough & Joan T. A. Gabel & Nancy R. Mansfield, 2015. "Probability Updating and the Market for Directors’ and Officers’ Insurance," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 18(1), pages 55-75, March.
    3. repec:eee:reveco:v:49:y:2017:i:c:p:437-452 is not listed on IDEAS
    4. 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.
    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. M. Martin Boyer, 2012. "Insurer Information, Insiders and Initial Public Offering," CIRANO Working Papers 2012s-30, CIRANO.
    7. 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.
    8. Boubakri, Narjess & Bouslimi, Lobna, 2016. "Directors’ and officers’ liability insurance and analyst forecast properties," Finance Research Letters, Elsevier, vol. 19(C), pages 22-32.

    More about this item

    Keywords

    Corporate governance; D&O insurance; Initial public offerings; Income trusts;

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • J44 - Labor and Demographic Economics - - Particular Labor Markets - - - Professional Labor Markets and Occupations
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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