Directors’ and Officers’ Liability Insurance and Acquisition Outcomes
Chinese University of Hong Kong (CUHK) - Department of Finance
Micah S. Officer
Loyola Marymount University - Department of Finance and Computer Information Systems
City University of Hong Kong
July 18, 2010
Journal of Financial Economics (JFE), Forthcoming
We examine the effect of directors’ and officers’ liability insurance (D&O insurance) on the outcomes of merger and acquisition (M&A) decisions. We find that acquirers whose executives have a higher level of D&O insurance coverage experience significantly lower announcement-period abnormal stock returns. Further analyses suggest that acquirers with a higher level of D&O insurance protection tend to pay higher acquisition premiums and their acquisitions appear to exhibit lower synergies. The evidence provides support for the notion that the provision of D&O insurance can induce unintended moral hazard by shielding directors and officers from the discipline of shareholder litigation.
Number of Pages in PDF File: 45
Keywords: D&O Insurance, Merger and Acquisition
JEL Classification: G14, G22, G34Accepted Paper Series
Date posted: July 18, 2010 ; Last revised: July 23, 2011
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