The role of information: When is Directors’ and Officers’ insurance value-added?
Yayuan Ren and
Journal of Banking & Finance, 2018, vol. 97, issue C, 189-197
The paper presents a model of shareholders' decisions to purchase Directors' and Officers' liability insurance (D&O insurance) for their directors. We consider the tradeoff between the governance enhancing effect and the moral hazard effect of D&O insurance and focus on the role of information in determining the optimal level of D&O insurance purchase. The model shows that when directors are well informed, the governance enhancing effect of D&O insurance dominates the moral hazard effect, and thus, D&O insurance adds value to the firm. When directors are under-informed, the best strategy for shareholders is not to provide D&O insurance for directors. The model further shows that the optimal level of D&O insurance, when it exists, increases in the quality of the information received by directors. These results imply cross-firm variations in D&O insurance purchase.
Keywords: Directors and Officers insurance; Information quality; Corporate governance (search for similar items in EconPapers)
JEL-codes: G30 G34 G22 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:97:y:2018:i:c:p:189-197
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