Directors’ and Officers’ Liability Insurance and Acquisition Outcomes

45 Pages Posted: 18 Jul 2010 Last revised: 23 Jul 2011

See all articles by Chen Lin

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Micah S. Officer

Loyola Marymount University - Department of Finance and Computer Information Systems

Hong Zou

The University of Hong Kong - Faculty of Business and Economics

Date Written: July 18, 2010

Abstract

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.

Keywords: D&O Insurance, Merger and Acquisition

JEL Classification: G14, G22, G34

Suggested Citation

Lin, Chen and Officer, Micah S. and Zou, Hong, Directors’ and Officers’ Liability Insurance and Acquisition Outcomes (July 18, 2010). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1641645

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Micah S. Officer (Contact Author)

Loyola Marymount University - Department of Finance and Computer Information Systems ( email )

Los Angeles, CA 90045
United States

Hong Zou

The University of Hong Kong - Faculty of Business and Economics ( email )

Hong Kong

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