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

54 Pages Posted: 18 Mar 2010 Last revised: 10 Aug 2015

Lea Henny Stern

University of Washington - Michael G. Foster School of Business

M. Martin Boyer

HEC Montreal - Department of Finance

Date Written: October 15, 2011

Abstract

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

Stern, Lea Henny and Boyer, M. Martin, Is Corporate Governance Risk Valued? Evidence from Directors’ and Officers’ Insurance (October 15, 2011). Journal of Corporate Finance, Vol. 18, No. 2, 2012. Available at SSRN: https://ssrn.com/abstract=1571752 or http://dx.doi.org/10.2139/ssrn.1571752

Lea Henny Stern

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

M. Martin Boyer (Contact Author)

HEC Montreal - Department of Finance ( email )

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

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