Insurers and Lenders as Monitors During Securities Litigation: Evidence from D&O Insurance Premiums, Interest Rates and Litigation Costs

Journal of Risk and Insurance, Forthcoming

Mays Business School Research Paper No. 3028807

36 Pages Posted: 31 Aug 2017 Last revised: 12 Jun 2019

See all articles by Dain C. Donelson

Dain C. Donelson

University of Texas at Austin - Red McCombs School of Business

Christopher G. Yust

Texas A&M University

Date Written: August 1, 2017

Abstract

This study examines whether directors’ and officers’ (D&O) insurers and lenders effectively monitor securities litigation and respond through pricing before case outcomes are known. By “monitoring,” we refer to tracking case progress and obtaining information from the insured (defendant) firm and its counsel prior to case resolution. We find that insurers and lenders increase rates, and that this effect is almost completely isolated to firms with cases that eventually settle. We confirm that this response is reasonable as settled cases are associated with lower future earnings, while there is generally no relation between future earnings and dismissed cases. As direct costs appear low, our results suggest that most costs are indirect in the form of reputational damage. Overall, our results suggest that researchers and policymakers interested in litigation should focus on settled cases, which are the only cases with material long-term costs.

Keywords: Securities Litigation, Directors’ and Officers’ Insurance, Interest Rates, Litigation Costs

JEL Classification: G14, G22, G38, K22, K41, M41

Suggested Citation

Donelson, Dain C. and Yust, Christopher G., Insurers and Lenders as Monitors During Securities Litigation: Evidence from D&O Insurance Premiums, Interest Rates and Litigation Costs (August 1, 2017). Journal of Risk and Insurance, Forthcoming; Mays Business School Research Paper No. 3028807. Available at SSRN: https://ssrn.com/abstract=3028807

Dain C. Donelson

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States
512-232-3733 (Phone)

Christopher G. Yust (Contact Author)

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4353
United States
979.845.3439 (Phone)

HOME PAGE: http://www.christopheryust.com

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