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

Abstract

Many academic studies use country-specific evidence to investigate research questions of broad interest due to unique 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 generally finds that policy limits are positively associated with firm agency cost measures. However, the U.S. and Canada differ on key legal issues relevant to securities litigation and institutional features of the D&O insurance market. Accordingly, we predict and find that premiums, rather than limits, provide useful information about U.S. agency cost measures. Thus, while researchers argue for disclosure of U.S. D&O insurance information, the usefulness of such disclosures would be limited. We conclude that calls for the disclosure of U.S. D&O insurance information are premature. Our findings provide a cautionary note 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