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Directors' and Officers' Insurance and Shareholder Protection

M. Martin Boyer

HEC Montreal - Department of Finance

March 2005

Corporate directors are liable for the corporation's actions as well as their own. Strangely, and by far, the most likely plaintiffs in a lawsuit against corporate directors are the shareholders who appointed them in the first place. As a result, directors often require protection so that their personal wealth is not expropriated in the event of a good faith error. There are three ways to protect a director's wealth: Corporate indemnification plans, Limited liability provisions and Directors' and officers' (D&O) insurance policies. Of the three types of protection, D&O insurance is arguably the strangest not because shareholders purchase it to protect directors in case of a lawsuit, but because it also protects shareholders. Using an original database, I test a set of hypotheses that should determine the demand for D&O insurance. Similar to Romano (1991a) and Gutiérrez (2003), my analysis suggests that D&O insurance protects the shareholders' wealth more than the directors'.

Number of Pages in PDF File: 37

Keywords: Directors' and Officers' Insurance, Corporate Insurance and Risk Management, Board Compensation

JEL Classification: G34, G22, J44, G32

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Date posted: February 28, 2006  

Suggested Citation

Boyer, M. Martin, Directors' and Officers' Insurance and Shareholder Protection (March 2005). Available at SSRN: https://ssrn.com/abstract=886504 or http://dx.doi.org/10.2139/ssrn.886504

Contact Information

M. Martin Boyer (Contact Author)
HEC Montreal - Department of Finance ( email )
3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
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