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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
KeywordsLegal liabilities
Directors' and officers' (D&O) insurance
Cost of equity
Investor protection
Issue Date2016
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/jae
Citation
Journal of Accounting and Economics, 2016, v. 61 n. 1, p. 100-120 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
ISSN
2023 Impact Factor: 5.4
2023 SCImago Journal Rankings: 8.337
SSRN
ISI Accession Number ID

 

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.issued2016-
dc.identifier.citationJournal of Accounting and Economics, 2016, v. 61 n. 1, p. 100-120-
dc.identifier.issn0165-4101-
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.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/jae-
dc.relation.ispartofJournal of Accounting and Economics-
dc.rights© 2015. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/-
dc.subjectLegal liabilities-
dc.subjectDirectors' and officers' (D&O) insurance-
dc.subjectCost of equity-
dc.subjectInvestor protection-
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.scopuseid_2-s2.0-84960233193-
dc.identifier.hkuros247908-
dc.identifier.volume61-
dc.identifier.issue1-
dc.identifier.spage100-
dc.identifier.epage120-
dc.identifier.isiWOS:000371936500006-
dc.publisher.placeNetherlands-
dc.identifier.ssrn2603532-
dc.identifier.issnl0165-4101-

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