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Directors’ and officers’ insurance and shareholder protection

Author Info

Listed author(s):
  • Boyer, Martin

    ()

    (HEC Montreal)

Abstract

Corporate directors are liable for the corporation’s actions as well as their own. Strangely, and by far, the most likely plaintiffs in a lawsuit against corporate directors are the shareholders who appointed them in the first place. As a result, directors often require protection so that their personal wealth is not expropriated in the event of a good faith error. There are three ways to protect a director’s wealth: corporate indemnification plans, limited liability provisions and directors’ and officers’ (D&O) insurance policies. Of the three types of protection, D&O insurance is arguably the strangest not because shareholders purchase it to protect directors in case of a lawsuit, but because it also protects shareholders. Using an original database, I test a set of hypotheses that should determine the demand for D&O insurance. My analysis suggests that D&O insurance protects the shareholders’ wealth more than the directors’.

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Article provided by EY Global FS Institute in its journal Journal of Financial Perspectives.

Volume (Year): 2 (2014)
Issue (Month): 1 ()
Pages: 107-128

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Handle: RePEc:ris:jofipe:0040
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Keywords: Insurance; corporate governance;

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Find related papers by JEL classification:
  • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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Cited by:

  1. M. Martin Boyer, 2012. "Insurer Information, Insiders and Initial Public Offering," CIRANO Working Papers 2012s-30, CIRANO.
  2. 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.
  3. Kalchev, Georgi, 2006. "The Demand for Directors’ and Officers’ Liability Insurance by US Public Companies," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 351-360.
  4. 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.
  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. 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.
  7. M. Martin Boyer & Amandine Hanon, 2009. "Protecting Directors and Officers from Liability Arising from Aggressive Earnings Management," CIRANO Working Papers 2009s-35, CIRANO.
  8. Yuan, Rongli & Sun, Jian & Cao, Feng, 2016. "Directors' and officers' liability insurance and stock price crash risk," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 173-192.

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