On Lawsuits, Corporate Governance, and Directors' and Officers' Liability Insurance

30 Pages Posted: 19 Jan 2016

See all articles by Stuart Gillan

Stuart Gillan

University of Georgia - Department of Finance

Christine Panasian

Saint Mary's University, Canada - Sobey School of Business

Date Written: December 2015

Abstract

We examine whether information about firms' directors' and officers' (D&O) liability insurance coverage provides insights into the likelihood of shareholder lawsuits. Using Canadian firms, we find evidence that firms with D&O insurance coverage are more likely to be sued and that the likelihood of litigation increases with increased coverage. These findings are consistent with managerial opportunism or moral hazard related to the insurance purchase decision. We also find that higher premiums are associated with the likelihood of litigation, indicating that insurers price this behavior. Taken together, the findings suggest that coverage and premium levels have the potential to convey information about lawsuit likelihood, and a firm's governance quality, to the marketplace.

Suggested Citation

Gillan, Stuart L. and Panasian, Christine, On Lawsuits, Corporate Governance, and Directors' and Officers' Liability Insurance (December 2015). Journal of Risk and Insurance, Vol. 82, Issue 4, pp. 793-822, 2015. Available at SSRN: https://ssrn.com/abstract=2717149 or http://dx.doi.org/10.1111/jori.12043

Stuart L. Gillan (Contact Author)

University of Georgia - Department of Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

Christine Panasian

Saint Mary's University, Canada - Sobey School of Business ( email )

Sobey Building 311
923 Robie Street
Halifax, Nova Scotia B3H 3C3
Canada

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