Managerial Opportunism? Evidence from Directors' and Officers' Insurance Purchases

John M. R. Chalmers, Larry Y. Dann and Jarrad Harford ()

Journal of Finance, 2002, vol. 57, issue 2, 609-636

Abstract: We analyze a sample of 72 IPO firms that went public between 1992 and 1996 for which we have detailed proprietary information about the amount and cost of D&O liability insurance. If managers of IPO firms are exploiting superior inside information, we hypothesize that the amount of insurance coverage chosen will be related to the post‐offering performance of the issuing firm's shares. Consistent with the hypothesis, we find a significant negative relation between the three‐year post‐IPO stock price performance and the insurance coverage purchased in conjunction with the IPO. One plausible interpretation is that, like insider securities transactions, D&O insurance decisions reveal opportunistic behavior by managers. This provides some motivation to argue that disclosure of the details of D&O insurance decisions, as is required in some other countries, is valuable.

Date: 2002
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:57:y:2002:i:2:p:609-636

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