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Protecting Directors and Officers from Liability Arising from Aggressive Earnings Management

M. Martin Boyer () and Amandine Hanon

CIRANO Working Papers from CIRANO

Abstract: A lingering topic in corporate governance is whether corporate directors should be protected against shareholder lawsuits and whether such protection reduces the incentives of directors to monitor appropriately the behaviour of corporate officers. To achieve this goal, we examine whether corporations whose corporate managers' wealth is protected under a directors' and officers' liability insurance policy (D&O insurance hereafter) are more to report accounting results aggressively. Using discretionary accruals as our measure of accounting aggressiveness, the results in our paper suggest that the magnitude of discretionary accruals has no real impact on the demand for D&O insurance, be it on the decision to purchase insurance or on the amount of limit chosen. The positivity of discretionary accruals appears, however, to have an impact on the decision to purchase insurance. Surprisingly, although these insurance policies protect directors and officers in the event they make a mistake in their role as representatives of the company, directors do not seem to see this as an invitation to be a little less careful when overseeing the firm's accounting practices. Un sujet qui demeure d'actualité quand on pense à la gouvernance des entreprises est le niveau de protection auquel les dirigeants devraient avoir droit en cas de poursuite par les actionnaires. Pour atteindre ce but, nous examinons s'il y a un lien entre la gestion agressive des courus discrétionnaires et la demande d'assurance de la responsabilité civile des administrateurs et dirigeants d'entreprise (ARCAD ci-après). Nous trouvons dans la présente étude que la taille des courus ne semble avoir aucun impact sur la demande d'assurance, que ce soit le fait même d'avoir un contrat ou la limite de la police. Le fait que les courus soient positifs semble toutefois avoir un impact sur le fait que les entreprises possèdent une ARCAD ou non. Nous demeurons perplexes de voir que même si l'ARCAD protège les dirigeants contre le coût de poursuites au civile, ces mêmes dirigeants ne voient pas cela comme une invitation au laxisme dans la supervision des pratiques comptables des entreprises.

Keywords: directors' and officers' liability insurance policy; aggressive accounting practices; earnings management; ARCAD; pratiques comptables agressives; résultats financiers de gestion. (search for similar items in EconPapers)
Date: 2009-08-01
New Economics Papers: this item is included in nep-acc and nep-ias
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Handle: RePEc:cir:cirwor:2009s-35