Protecting Directors and Officers from Liability Arising from Aggressive Earnings Management

27 Pages Posted: 12 Nov 2009 Last revised: 21 Apr 2012

See all articles by M. Martin Boyer

M. Martin Boyer

HEC Montreal - Department of Finance

Hanon Amandine

Procter and Gamble

Date Written: August 1, 2009

Abstract

A lingering topic in corporate governance is whether corporate directors should be protected against shareholder lawsuits and whether such protection reduces the incentives of directors to monitor appropriately the behaviour of corporate officers. To achieve this goal, we examine whether corporations whose corporate managers’ wealth is protected under a directors’ and officers’ liability insurance policy (D&O insurance hereafter) are more to report accounting results aggressively. Using discretionary accruals as our measure of accounting aggressiveness, the results in our paper suggest that the magnitude of discretionary accruals has no real impact on the demand for D&O insurance, be it on the decision to purchase insurance or on the amount of limit chosen. The positivity of discretionary accruals appears, however, to have an impact on the decision to purchase insurance. Surprisingly, although these insurance policies protect directors and officers in the event they make a “mistake” in their role as representatives of the company, directors do not seem to see this as an invitation to be a little less careful when overseeing the firm’s accounting practices.

Keywords: directors’ and officers’ liability insurance policy, aggressive accounting practices, earnings management

Suggested Citation

Boyer, M. Martin and Amandine, Hanon, Protecting Directors and Officers from Liability Arising from Aggressive Earnings Management (August 1, 2009). CIRANO - Scientific Publications 2009s-35, Available at SSRN: https://ssrn.com/abstract=1504208 or http://dx.doi.org/10.2139/ssrn.1504208

M. Martin Boyer (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Hanon Amandine

Procter and Gamble ( email )

United States

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