Heterogeneous Beliefs and the Demand for D&O Insurance by Listed Companies

Peter Egger, Doina Radulescu, Ray Rees and Doina Maria Radulescu
Authors registered in the RePEc Author Service: Doina Maria Radulescu

No 4621, CESifo Working Paper Series from CESifo

Abstract: This paper introduces a new rationale for the existence of “Directors’ and Officers’” (D&O) insurance. We use a model with volatile stock markets where shareholders design compensation schemes that incentivize managers to stimulate short-term increases in stock prices that do not maximize long run stock market value. We show that D&O insurance provides a convenient instrument for the initial shareholders of a company to take advantage of differences in beliefs between insiders and outsiders in capital markets. The empirical results support the idea that both the insurance coverage and the premium are higher in the presence of new shareholders and volatile markets. The results prove robust in various empirical model specifications.

Keywords: D&O insurance; volatile markets; credible protection; panel data models (search for similar items in EconPapers)
JEL-codes: C23 G22 G30 M52 (search for similar items in EconPapers)
Date: 2014
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Journal Article: Heterogeneous Beliefs and the Demand for D&O Insurance by Listed Companies (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_4621

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