Directors’ and Officers’ Liability Insurance, Independent Director Behavior, and Governance Effect

Abstract

We examine the effect of directors’ and officers’ liability insurance (D&O insurance) on the behavior of independent directors and the effectiveness of their governance role. Using a unique data set, we find a negative relation between D&O insurance and personal board meeting attendance by independent directors and a positive relation between D&O insurance and meeting attendance by authorized representatives. Content analysis of independent director opinion reports indicates that D&O insurance encourages independent directors to behave less responsibly. Insured independent directors are also more likely to be busy. Collectively, D&O insurance reduces the effectiveness of independent directors in corporate governance.

Why do firms purchase directors' and officers' liability insurance? – perspective from economic policy uncertainty

“…Jia et al (2019) report that politically connected firms are less likely to purchase D&O insurance because political connections provide firms with legal protection from the risk of litigation against D&Os. Jia and Tang (2018) state that D&O CAFR 24,1 insurance purchased by Chinese listed firms encourages independent directors to behave less responsibly, thus reducing their personal board meeting attendance and taking on too many directorships. However, Yuan et al (2016) find a negative effect of D&O insurance on stock price crash risk, fewer financial restatements and more disclosure of corporate social responsibility reports in their sample of Chinese listed firms, suggesting a conducive effect of D&O insurance on corporate governance.…”

“…Because of the availability of D&O insurance data, China is becoming an important testing ground for the determinants and consequences of the insurance, evidenced by the burgeoning literature on D&O insurance using Chinese data (e.g. Zou et al, 2008;Jia et al, 2019;Jia & Tang, 2018;Wang et al, 2020;Yuan, Sun & Cao, 2016). Research on D&O insurance requires manual data collection in other countries because of the lack of readily downable data, which restricts empirical investigations and leads to a relatively small stream of literature on D&O insurance, mainly in Canada (e.g.…”

Operação Lava Jato: Impactos no Mercado Segurador de Responsabilidade Civil de Executivos

“…However, there is no consensus in the literature about the effects of insurance on companies. Some research identify beneficial effects of D&O insurance for the company (Holderness, 1990;Hwang & Kim, 2018;Mayers & Smith, 1982), research that identify harmful effects (Chalmers, Dann, & Harford, 2002;Jia & Tang, 2016;Lin et al, 2011;Zou, Wong, Shum, Xiong, & Yan, 2008) and research that identify both (Boyer & Tennyson, 2015;Liao & Li, 2017).…”

“…There is important both actuarial and accounting literature in which it is usual to empirically address the factors associated with the demand for D&O insurance and its role in corporate governance (Gillan & Panasian, 2015;Hwang & Kim, 2018;Jia & Tang, 2016;Lin, Officer, & Zou, 2011). However, even in the United States, where the insurance industry underwrites more than US$ 5 billion in annual D&O insurance premiums only, there is a lack of research examining the insurance supply's side (Born & Klimaszewski-Blettner, 2013;Fier & Liebenberg, 2014).…”

Insurers and Lenders as Monitors During Securities Litigation: Evidence from D&O Insurance Premiums, Interest Rates, and Litigation Costs

“…Thus, firms facing litigation take on larger total premium increases than those in Table alone, but the costs are mainly borne by firms facing settled litigation and are relatively small. Also, higher limits could have other negative long term effects as prior studies find that higher limits are related to higher risk (e.g., Boyer and Tennyson, ; Jia and Tang, ).…”