Information Embedded in Directors and Officers Insurance Purchases

34 Pages Posted: 5 Dec 2011 Last revised: 24 Mar 2012

See all articles by Manu Gupta

Manu Gupta

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate

Puneet Prakash

Missouri State University

Date Written: March 22, 2012

Abstract

We examine corporate purchases of Directors and Officers (D&O) liability insurance and find that in addition to governance quality it contains managers’ private information. In particular, we find that insider control in excess of insider share holdings is jointly associated with lower D&O coverage limits and higher firm performance. The result holds when deductibles, corporate governance characteristics and litigation risk factors are controlled for. Our finding is consistent with asymmetric information hypothesis in financial markets which posits that managers possess private information about firm risk. Our findings differ from extant literature that shows that D&O insurance purchases primarily reflect firm’s governance quality and litigation risk. The evidence supports the policy prescription advanced in earlier studies which call for mandatory public disclosure of D&O insurance purchases since it contains additional information for the market.

Keywords: Directors’ and Officers’ insurance, corporate governance, information, risk

JEL Classification: G14, G22, G39

Suggested Citation

Gupta, Manu and Prakash, Puneet, Information Embedded in Directors and Officers Insurance Purchases (March 22, 2012). Available at SSRN: https://ssrn.com/abstract=1968571 or http://dx.doi.org/10.2139/ssrn.1968571

Manu Gupta (Contact Author)

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate ( email )

Richmond, VA 23284
United States

Puneet Prakash

Missouri State University ( email )

United States
65897 (Fax)

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