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Information Embedded in Directors and Officers Insurance Purchases

Author

Listed:
  • Manu Gupta

    (Finance Insurance and Real Estate, Virginia Commonwealth University, 301 W Main St, Richmond, VA 23284, U.S.A.)

  • Puneet Prakash

    (Finance Insurance and Real Estate, Virginia Commonwealth University, 301 W Main St, Richmond, VA 23284, U.S.A.)

Abstract

We examine corporate purchases of Directors and Officers (D&O) liability insurance and find that in addition to governance quality it contains managers’ private information. In particular, we find that insider control in excess of insider share holdings is jointly associated with lower D&O coverage limits and higher firm performance. The result holds when deductibles, corporate governance characteristics and litigation risk factors are controlled for. Our finding is consistent with an asymmetric information hypothesis in financial markets which posits that managers possess private information about firm risk. Our findings differ from existing literature that shows that D&O insurance purchases primarily reflect firm's governance quality and litigation risk. The evidence supports the policy prescription advanced in earlier studies which call for mandatory public disclosure of D&O insurance purchases since it contains additional information for the market.

Suggested Citation

  • Manu Gupta & Puneet Prakash, 2012. "Information Embedded in Directors and Officers Insurance Purchases," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 37(3), pages 429-451, July.
    • Handle: RePEc:pal:gpprii:v:37:y:2012:i:3:p:429-451
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    Citations

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    Cited by:

    1. Chiang, Yao-Min & Chang, Pang-Ru, 2022. "Overinvestment, ownership structure, and directors' and officers’ liability insurance," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 38-50.
    2. Huang, Rachel J. & Jeng, Vivian & Wang, Cheng-Wei & Yue, Jack C., 2021. "Does size and book-to-market contain intangible information about managerial incentives? Learning from corporate D&O insurance purchase," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    3. 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.
    4. Li-Su Huang, 2022. "Directors and officers liability insurance and default risk," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 47(2), pages 375-408, April.
    5. 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.
    6. Lai, Yi-Hsun & Tai, Vivian W., 2019. "Managerial overconfidence and directors' and officers' liability insurance," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    7. Liao, Tsai-Ling & Chuang, Hwei-Lin & Wang, Jo-Yu, 2022. "Directors' and officers’ liability insurance and the pricing of seasoned equity offerings," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 12-26.
    8. Dain C. Donelson & Jennifer L. Glenn & Christopher G. Yust, 2022. "Is tax aggressiveness associated with tax litigation risk? Evidence from D&O Insurance," Review of Accounting Studies, Springer, vol. 27(2), pages 519-569, June.

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