Is skin in the game a game changer? Evidence from mandatory changes of D&O insurance policies

Chen Lin, Micah S. Officer, Thomas Schmid and Hong Zou

Journal of Accounting and Economics, 2019, vol. 68, issue 1

Abstract: This paper examines the incentive effects of a mandatory personal deductible in liability insurance contracts for directors and officers (D&Os). Exploiting a novel German law that mandates personal deductibles for executives, we document positive returns for affected firms around the first announcement of the plan to impose a personal deductible. We also find evidence of long-run effects: affected firms decrease risk taking in operational activities and financial reporting, and improve the quality of takeover decisions. Our study shows that the structure of D&O insurance contracts matters because mandating that D&Os have “skin in the game” appears to lead to real effects on firm value.

Keywords: D&O liability insurance; Deductible; Legal liability; Firm value; Risk taking; Accruals (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:68:y:2019:i:1:s0165410119300011

DOI: 10.1016/j.jacceco.2019.01.001

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