Directors׳ and officers׳ liability insurance and the cost of equity
Zhihong Chen,
Oliver Zhen Li and
Hong Zou
Journal of Accounting and Economics, 2016, vol. 61, issue 1, 100-120
Abstract:
We examine whether directors׳ and officers׳ (D&O) liability insurance affects a firm’s cost of equity. We find a positive association between D&O insurance and the cost of equity. Information quality and risk-taking appear to be two underlying channels through which D&O insurance affects the cost of equity. Further tests suggest that this positive association is not due to optimal risk-taking, as evidenced by a negative market reaction to an increase in D&O insurance coverage, a lack of improvement in firms׳ cash flow and a low valuation associated with high D&O insurance. Overall, our evidence is consistent with the notion that D&O insurance weakens the disciplining effect of shareholder litigation, leading to an increase in the cost of equity.
Keywords: Legal liabilities; Directors' and officers' (D&O) insurance; Cost of equity; Investor protection (search for similar items in EconPapers)
JEL-codes: G22 G32 M41 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (33)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:61:y:2016:i:1:p:100-120
DOI: 10.1016/j.jacceco.2015.04.001
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