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

34 Pages Posted: 28 May 2020

Multiple version iconThere are 2 versions of this paper

Date Written: September 2019

Abstract

This study examines whether directors’ and officers’ 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.

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 (September 2019). Journal of Risk and Insurance, Vol. 86, Issue 3, pp. 663-696, 2019, Available at SSRN: https://ssrn.com/abstract=3610283 or http://dx.doi.org/10.1111/jori.12231

Dain C. Donelson (Contact Author)

University of Iowa ( email )

108 Pappajohn Business Building
Iowa City, 52242-1000
United States

Christopher G. Yust

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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