Is Skin in the Game a Game Changer? Evidence from Mandatory Changes to D&O Insurance Policies

54 Pages Posted: 29 Mar 2017 Last revised: 29 Jan 2019

See all articles by Chen Lin

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Micah S. Officer

Loyola Marymount University - Department of Finance and Computer Information Systems

Thomas Schmid

The University of Hong Kong - Faculty of Business and Economics

Hong Zou

The University of Hong Kong - Faculty of Business and Economics

Date Written: March 8, 2018

Abstract

This paper examines the incentive effects of a mandatory personal deductible in liability insurance contracts for directors and officers (D&Os). Exploiting a novel German law that mandates personal deductibles for executives, we document positive returns for affected firms around the first announcement of the personal deductible. We also find evidence of long-run effects: affected firms decrease risk taking in operational activities and financial reporting, and improve the quality of takeover decisions. Our study shows that the structure of D&O insurance contracts matters because mandating that D&Os have “skin in the game” appears to lead to real effects on firm value.

Keywords: Directors and officers (D&O) liability, D&O insurance, deductibles, firm value, risk taking

JEL Classification: G32, G34

Suggested Citation

Lin, Chen and Officer, Micah S. and Schmid, Thomas and Zou, Hong, Is Skin in the Game a Game Changer? Evidence from Mandatory Changes to D&O Insurance Policies (March 8, 2018). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2941991 or http://dx.doi.org/10.2139/ssrn.2941991

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Micah S. Officer (Contact Author)

Loyola Marymount University - Department of Finance and Computer Information Systems ( email )

Los Angeles, CA 90045
United States

Thomas Schmid

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Hong Zou

The University of Hong Kong - Faculty of Business and Economics ( email )

Hong Kong

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