The Cost of Disclosure Regulation: Evidence from D&O Insurance and Nonmeritorious Securities Litigation

67 Pages Posted: 6 Feb 2018 Last revised: 3 May 2018

See all articles by Dain C. Donelson

Dain C. Donelson

University of Texas at Austin - Red McCombs School of Business

Justin Hopkins

University of Virginia - Darden School of Business

Christopher G. Yust

Texas A&M University

Date Written: 2018

Abstract

This study examines whether the required disclosure of directors’ and officers’ (D&O) insurance premiums leads to nonmeritorious securities litigation. Our research setting uses a proprietary D&O insurance database that includes New York and non-New York firms, combined with the fact that New York firms must disclose D&O insurance premiums. We thus can exploit a natural experiment based on inter-state variation in disclosure regulation. Disclosed premiums may influence case selection in two ways. First, higher premiums signal higher limits, which plaintiffs’ lawyers likely believe enable higher settlements. Second, higher premiums indicate higher risk assessments from insurers and thus a higher likelihood that stock price drops signal misconduct rather than bad luck. We find that D&O insurance premiums for New York firms are associated with a higher dismissal rate. Offsetting this higher dismissal rate, plaintiffs’ lawyers can achieve higher settlements in the relatively few successful cases.

Keywords: Disclosure Regulation; Directors’ and Officers’ (D&O) Insurance, Litigation

JEL Classification: G38, K22, K41, M41

Suggested Citation

Donelson, Dain C. and Hopkins, Justin and Yust, Christopher G., The Cost of Disclosure Regulation: Evidence from D&O Insurance and Nonmeritorious Securities Litigation (2018). Review of Accounting Studies, 23 (2), pp. 528-588, June 2018; Mays Business School Research Paper No. 3112661. Available at SSRN: https://ssrn.com/abstract=3112661

Dain C. Donelson

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

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

Justin Hopkins

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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

Register to save articles to
your library

Register

Paper statistics

Downloads
89
rank
279,514
Abstract Views
460
PlumX Metrics