U.S. Evidence from D&O Insurance on Accounting-Related Agency Costs: Implications for Country-Specific Studies

Abstract

Many studies use country-specific evidence to investigate research questions of broad interest due to research advantages of a given country, such as data availability or to exploit an exogenous event that allows identification. One such research stream examines Canadian directors’ and officers’ (D&O) insurance and finds that policy limits are positively associated with financial reporting quality and related litigation (accounting-related agency costs). However, the U.S. and Canada differ on key issues relevant to securities litigation and D&O insurance. Thus, we predict and find that premiums, rather than limits, provide information about U.S. accounting-related agency costs. Nonetheless, the incremental information provided by premiums is limited, and audit fees provide more consistent and better information. Thus, while researchers argue for disclosure of U.S. D&O insurance information, the usefulness of such disclosures may be limited because audit fees are already disclosed. Our findings also provide caution for the generalizability of country-specific studies.

Keywords: Directors’ and Officers’ Insurance; Audit Fees; Agency Costs; Financial Reporting

JEL Classification: G22, G32, G34, G38, K22, K41, M41, M42