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
Date Written: March 8, 2018
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: Suggested Citation