The Directors' and Officers' Insurance Premium: An Outside Assessment of the Quality of Corporate Governance
46 Pages Posted: 4 Jul 2000
Date Written: May 2000
Using a sample of D&O premiums gathered from the proxy statements of Canadian companies, this article examines the D&O premium as a measure of ex ante litigation risk. I find a significant association between D&O premiums and variables that proxy for the quality of firms' governance structures. The association between the proxies for governance structure quality and D&O premiums is robust to a number of alternative specifications. This article provides confirmatory evidence that the D&O premium reflects the quality of the firm's corporate governance by showing that measures of weak governance implied by the D&O premium are positively related to excess CEO compensation. The overall results suggest that D&O premiums contain useful information about the quality of firms' governance.
JEL Classification: G30, K22, K41, J33, J41
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