D&O Insurance and IPO Performance: What Can We Learn from Insurers?

Abstract

We investigate whether a firm’s directors’ and officers’ liability insurance contract at the time of the IPO is related to insured firms’ first year post-IPO performance. We find that insurers charge a higher premium per dollar of coverage to protect the directors and officers of firms that will subsequently have poor first year post-IPO stock performance. A higher price of coverage is also associated with a higher post-IPO volatility and lower Sharpe ratio. Our results are robust to various econometric specifications and suggest that even when the high level of information asymmetry inherent to the IPO context prevails, insurers have information about the firms’ prospects that should be valuable to outside investors.

Keywords: D&O insurance, Initial Public Offering, return predictability, stock return volatility, information asymmetry, governance indices

JEL Classification: G22, G30, G39