Managerial Opportunism in Accounting Choice: Evidence from Directors' and Officers' Liability Insurance Purchases

50 Pages Posted: 20 Mar 2008

See all articles by Narjess Boubakri

Narjess Boubakri

American University of Sharjah - School of Business and Management; HEC Montreal - Department of Finance

Nabil Ghalleb

HEC Montreal

M. Martin Boyer

HEC Montreal - Department of Finance

Date Written: March 2008

Abstract

We examine the relation between the managerial opportunism embedded in earnings management, and D&O insurance. We investigate (a) whether managers are more willing to engage in opportunistic behavior by adopting an aggressive earnings management strategy when they are covered by a relatively higher D&O insurance limit; (b) whether managers purchase D&O insurance coverage in anticipation of opportunistic accounting choice; and (c) whether insurers can distinguish abnormally large insurance purchases driven by opportunism in accounting choice from those driven by abnormal risk aversion. Our evidence strongly supports the managerial opportunism hypothesis in managing earnings. In particular, we find that managers purchase insurance coverage in anticipation of opportunistic earnings management around equity issuing events. We also find that the best insured managers are those who manipulate the most the earnings. Interestingly, we find that the insurers are not myopic to the harms of opportunistic managerial behavior. They are able to detect and charge higher insurance premiums to managers with a hidden opportunistic agenda. Overall, these results suggest that the D&O insurance market enhances opportunistic managerial behavior. We do not find any support for the prediction that lower D&O insurance premiums are associated with good corporate governance quality.

Keywords: Directors, and Officers, liability insurance, managerial opportunism, seasoned equity offerings, earnings management

JEL Classification: G22, G32

Suggested Citation

Boubakri, Narjess and Ghalleb, Nabil and Boyer, M. Martin, Managerial Opportunism in Accounting Choice: Evidence from Directors' and Officers' Liability Insurance Purchases (March 2008). Available at SSRN: https://ssrn.com/abstract=1109254 or http://dx.doi.org/10.2139/ssrn.1109254

Narjess Boubakri (Contact Author)

American University of Sharjah - School of Business and Management ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

HOME PAGE: http://www.aus.edu

HEC Montreal - Department of Finance ( email )

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

Nabil Ghalleb

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada

M. Martin Boyer

HEC Montreal - Department of Finance ( email )

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

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