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An Economic Analysis of Corporate Directors' Fiduciary Duties

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  • Gutierrez, Maria

Abstract

I present a principal-agent model where the shareholders (principal) can take legal action against the director (agent). The court's decision provides a verifiable but costly and imperfect signal on the director's fulfillment of his fiduciary duties. The director's remuneration can be made contingent not only on performance but also upon the court's decision. I show that when damage awards are high enough, the widespread use of liability insurance and limited-liability provisions that is observed in the United States is optimal because it allows for a more efficient litigation strategy to be ex post rational for the shareholders. Copyright 2003 by the RAND Corporation.

Suggested Citation

  • Gutierrez, Maria, 2003. "An Economic Analysis of Corporate Directors' Fiduciary Duties," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 516-535, Autumn.
    • Handle: RePEc:rje:randje:v:34:y:2003:i:3:p:516-35
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    Cited by:

    1. Aaron Finkle, 2010. "Contracts in the Shadow of the Law: Optimal Litigation Strategies within Organizations," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 9(2), pages 131-155, August.
    2. Engert Andreas & Goldlücke Susanne, 2017. "Why Agents Need Discretion: The Business Judgment Rule as Optimal Standard of Care," Review of Law & Economics, De Gruyter, vol. 13(1), pages 1-38, March.
    3. Jui-I Chang & Chen-Ying Lee & Geng-Yu Lin, 2021. "Real earnings management and borrowing costs: The moderating effect of the directors’ and officers' liability insurance," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 11(5), pages 1-3.
    4. Aguir, Iness & Aguir, Wael, 2020. "Director and officer liability protection and firm value: Unintended consequences," Finance Research Letters, Elsevier, vol. 32(C).
    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.

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