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Is Corporate Governance Risk Valued? Evidence from Directors’ and Officers’ Insurance

Lea Henny Stern

Syracuse University - Department of Finance

M. Martin Boyer

HEC Montreal - Department of Finance

February 10, 2010

The role and duty of corporate directors and officers is in constant flux. If the company is sued, corporate directors and officers may be held personally liable for having breached their duty toward the firm’s stakeholders. As a consequence, before accepting to sit on the board of any organization would-be directors require that their personal wealth be protected; this protection is provided through what is known as a directors’ and officers’ liability insurance contract, or D&O insurance. In this paper, we examine whether D&O insurers charge a higher premium to firms that appear to have higher governance risk. We find that common equity firms pay lower D&O insurance premiums than income trusts, an alternative and, arguably, riskier ownership form. This result has wide-ranging implications for investors insofar as the information provided by D&O insurers provides investors with an unbiased signal of the firm’s governance risk. The signal is unbiased because it comes from an entity (i.e. the insurer) that has a direct financial incentive to correctly assess an organization’s governance risk, in contrast to other ad hoc governance measures and indices.

Number of Pages in PDF File: 45

Keywords: Corporate governance, D&O insurance, Initial public offerings, Income trusts

JEL Classification: G34, G22, J44, G32

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Date posted: March 18, 2010 ; Last revised: April 12, 2010

Suggested Citation

Stern, Lea Henny and Boyer, M. Martin, Is Corporate Governance Risk Valued? Evidence from Directors’ and Officers’ Insurance (February 10, 2010). Available at SSRN: http://ssrn.com/abstract=1571752 or http://dx.doi.org/10.2139/ssrn.1571752

Contact Information

Lea Henny Stern
Syracuse University - Department of Finance ( email )
United States
M. Martin Boyer (Contact Author)
HEC Montreal - Department of Finance ( email )
3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
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