Is Corporate Governance Risk Valued? Evidence from Directors’ and Officers’ Insurance
54 Pages Posted: 18 Mar 2010 Last revised: 10 Aug 2015
Date Written: October 15, 2011
We find that common equity firms pay lower D&O insurance premiums than income trusts, an alternative and 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.
Keywords: Corporate governance, D&O insurance, Initial public offerings, Income trusts
JEL Classification: G34, G22, J44, G32
Suggested Citation: Suggested Citation