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Directors’ and officers’ insurance and shareholder protection

M. Martin Boyer ()

Journal of Financial Perspectives, 2014, vol. 2, issue 1, 107-128

Abstract: 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. My analysis suggests that D&O insurance protects the shareholders’ wealth more than the directors’.

Keywords: Insurance; corporate governance (search for similar items in EconPapers)
JEL-codes: G22 (search for similar items in EconPapers)
Date: 2014
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