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Insurer Information, Insiders and Initial Public Offering

  • M. Martin Boyer

This paper develops and tests hypotheses regarding the relationship between D&O insurance purchase and firm size, governance characteristics, and business risk, using a unique panel dataset on Canadian firms for years 1996-2005. The rich data permit examination of the determinants of insurance pricing, ownership, and coverage limits. The panel structure of the data also permits examination of the effects of insurance on corporate governance and earnings management. The paper adds to the literature by constructing empirical models motivated by theoretical considerations, controlling for firms' self-selection into insurance, and accounting for industry and year effects. Results provide strong statistical evidence for the view that D&O insurance markets take corporate risk into account, but insurance reduces the deterrent effects of potential liability for mismanagement. The findings suggest that mandatory disclosure of D&O insurance, as required in Canada, is not sufficient to control the moral hazard effects of insurance ownership.

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File URL: http://www.cirano.qc.ca/files/publications/2012s-30.pdf
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Paper provided by CIRANO in its series CIRANO Working Papers with number 2012s-30.

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Length: 45 pages
Date of creation: 01 Nov 2012
Date of revision:
Handle: RePEc:cir:cirwor:2012s-30
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  1. Randolph P. Beatty & Jay R. Ritter, . "Investment Banking, Reputation and the Underpricing of Initial Public Offerings," Rodney L. White Center for Financial Research Working Papers 02-85, Wharton School Rodney L. White Center for Financial Research.
  2. John M. R. Chalmers & Larry Y. Dann & Jarrad Harford, 2002. "Managerial Opportunism? Evidence from Directors' and Officers' Insurance Purchases," Journal of Finance, American Finance Association, vol. 57(2), pages 609-636, 04.
  3. Ritter, Jay R., 1987. "The costs of going public," Journal of Financial Economics, Elsevier, vol. 19(2), pages 269-281, December.
  4. Core, John E, 2000. "The Directors' and Officers' Insurance Premium: An Outside Assessment of the Quality of Corporate Governance," Journal of Law, Economics and Organization, Oxford University Press, vol. 16(2), pages 449-77, October.
  5. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
  6. Bhagat, Sanjai & Bolton, Brian, 2008. "Corporate governance and firm performance," Journal of Corporate Finance, Elsevier, vol. 14(3), pages 257-273, June.
  7. Lucian Bebchuk & Alma Cohen & Allen Ferrell, 2009. "What Matters in Corporate Governance?," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 783-827, February.
  8. M. Martin Boyer, 2003. "Directors' and Officers' Insurance and Shareholders' Protection," CIRANO Working Papers 2003s-64, CIRANO.
  9. 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.
  10. McTier, Brian C. & Wald, John K., 2011. "The causes and consequences of securities class action litigation," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 649-665, June.
  11. Ritter, Jay R, 1991. " The Long-run Performance of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(1), pages 3-27, March.
  12. Holderness, Clifford G., 1990. "Liability insurers as corporate monitors," International Review of Law and Economics, Elsevier, vol. 10(2), pages 115-129, September.
  13. Renée Adams & Benjamin E. Hermalin & Michael S. Weisbach, 2008. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," NBER Working Papers 14486, National Bureau of Economic Research, Inc.
  14. 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.
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