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Article: Directors' and officers' liability insurance and loan spreads

TitleDirectors' and officers' liability insurance and loan spreads
Authors
KeywordsCost Of Debt Financing
Credit Risk
Directors' And Officers' Liability Insurance
Loan Spreads
Issue Date2013
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/jfec
Citation
Journal Of Financial Economics, 2013, v. 110 n. 1, p. 37-60 How to Cite?
AbstractWe analyze the effect of directors' and officers' liability insurance (D&O insurance) on the spreads charged on bank loans. We find that higher levels of D&O insurance coverage are associated with higher loan spreads and that this relation depends on loan characteristics in economically sensible ways and is attenuated by monitoring mechanisms. This association between loan spreads and D&O insurance coverage is robust to controlling for endogeneity (because both could be related to firm risk). Our evidence suggests that lenders view D&O insurance coverage as increasing credit risk (potentially via moral hazard or information asymmetry). Further analyses show that higher levels of D&O insurance coverage are associated with greater risk taking and higher probabilities of financial restatement due to aggressive financial reporting. While greater use of D&O insurance increases the cost of debt, we find some evidence that D&O insurance coverage appears to improve the value of large increases in capital expenditure for firms with better internal and external governance. © 2013.
Persistent Identifierhttp://hdl.handle.net/10722/188474
ISSN
2015 Impact Factor: 3.541
2015 SCImago Journal Rankings: 9.920
SSRN
ISI Accession Number ID

 

DC FieldValueLanguage
dc.contributor.authorLin, Cen_US
dc.contributor.authorOfficer, MSen_US
dc.contributor.authorWang, Ren_US
dc.contributor.authorZou, Hen_US
dc.date.accessioned2013-09-03T04:07:48Z-
dc.date.available2013-09-03T04:07:48Z-
dc.date.issued2013en_US
dc.identifier.citationJournal Of Financial Economics, 2013, v. 110 n. 1, p. 37-60en_US
dc.identifier.issn0304-405Xen_US
dc.identifier.urihttp://hdl.handle.net/10722/188474-
dc.description.abstractWe analyze the effect of directors' and officers' liability insurance (D&O insurance) on the spreads charged on bank loans. We find that higher levels of D&O insurance coverage are associated with higher loan spreads and that this relation depends on loan characteristics in economically sensible ways and is attenuated by monitoring mechanisms. This association between loan spreads and D&O insurance coverage is robust to controlling for endogeneity (because both could be related to firm risk). Our evidence suggests that lenders view D&O insurance coverage as increasing credit risk (potentially via moral hazard or information asymmetry). Further analyses show that higher levels of D&O insurance coverage are associated with greater risk taking and higher probabilities of financial restatement due to aggressive financial reporting. While greater use of D&O insurance increases the cost of debt, we find some evidence that D&O insurance coverage appears to improve the value of large increases in capital expenditure for firms with better internal and external governance. © 2013.en_US
dc.languageengen_US
dc.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/jfecen_US
dc.relation.ispartofJournal of Financial Economicsen_US
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.rightsNOTICE: this is the author’s version of a work that was accepted for publication in Journal of Financial Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in PUBLICATION, [VOL 110, ISSUE 1, (2013)] DOI 10.1016/j.jfineco.2013.04.005-
dc.subjectCost Of Debt Financingen_US
dc.subjectCredit Risken_US
dc.subjectDirectors' And Officers' Liability Insuranceen_US
dc.subjectLoan Spreadsen_US
dc.titleDirectors' and officers' liability insurance and loan spreadsen_US
dc.typeArticleen_US
dc.identifier.emailZou, H: hongzou@hku.hken_US
dc.identifier.authorityZou, H=rp01800en_US
dc.description.naturepostprinten_US
dc.identifier.doi10.1016/j.jfineco.2013.04.005en_US
dc.identifier.scopuseid_2-s2.0-84883271310en_US
dc.identifier.hkuros232942-
dc.identifier.isiWOS:000324723600003-
dc.publisher.placeNetherlandsen_US
dc.identifier.ssrn1865679-
dc.identifier.scopusauthoridLin, C=25630694300en_US
dc.identifier.scopusauthoridOfficer, MS=6507728699en_US
dc.identifier.scopusauthoridWang, R=55766209700en_US
dc.identifier.scopusauthoridZou, H=48663306300en_US

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