Download This PaperDirectors’ and Officers’ Liability Insurance and Acquisition Outcomes
45 Pages Posted: 18 Jul 2010 Last revised: 23 Jul 2011
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: Suggested Citation
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