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Article: Directors’ and officers’ liability insurance and the cost of equity

TitleDirectors’ and officers’ liability insurance and the cost of equity
Authors
Issue Date2015
Citation
Journal of Accounting and Economics, 2015 How to Cite?
AbstractWe examine whether directors׳ and officers׳ (D&O) liability insurance affects a firm’s cost of equity. We find a positive association between D&O insurance and the cost of equity. Information quality and risk-taking appear to be two underlying channels through which D&O insurance affects the cost of equity. Further tests suggest that this positive association is not due to optimal risk-taking, as evidenced by a negative market reaction to an increase in D&O insurance coverage, a lack of improvement in firms׳ cash flow and a low valuation associated with high D&O insurance. Overall, our evidence is consistent with the notion that D&O insurance weakens the disciplining effect of shareholder litigation, leading to an increase in the cost of equity.
Persistent Identifierhttp://hdl.handle.net/10722/214696
SSRN

 

DC FieldValueLanguage
dc.contributor.authorChen, Z-
dc.contributor.authorLi, O-
dc.contributor.authorZou, H-
dc.date.accessioned2015-08-21T11:51:56Z-
dc.date.available2015-08-21T11:51:56Z-
dc.date.issued2015-
dc.identifier.citationJournal of Accounting and Economics, 2015-
dc.identifier.urihttp://hdl.handle.net/10722/214696-
dc.description.abstractWe examine whether directors׳ and officers׳ (D&O) liability insurance affects a firm’s cost of equity. We find a positive association between D&O insurance and the cost of equity. Information quality and risk-taking appear to be two underlying channels through which D&O insurance affects the cost of equity. Further tests suggest that this positive association is not due to optimal risk-taking, as evidenced by a negative market reaction to an increase in D&O insurance coverage, a lack of improvement in firms׳ cash flow and a low valuation associated with high D&O insurance. Overall, our evidence is consistent with the notion that D&O insurance weakens the disciplining effect of shareholder litigation, leading to an increase in the cost of equity.-
dc.languageeng-
dc.relation.ispartofJournal of Accounting and Economics-
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.titleDirectors’ and officers’ liability insurance and the cost of equity-
dc.typeArticle-
dc.identifier.emailZou, H: hongzou@hku.hk-
dc.identifier.authorityZou, H=rp01800-
dc.description.naturepostprint-
dc.identifier.doi10.1016/j.jacceco.2015.04.001-
dc.identifier.hkuros247908-
dc.identifier.ssrn2603532-

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