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On Lawsuits, Corporate Governance, and Directors' and Officers' Liability Insurance
Author(s) -
Gillan Stuart L.,
Panasian Christine A.
Publication year - 2015
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/jori.12043
Subject(s) - corporate governance , opportunism , business , lawsuit , litigation risk analysis , liability insurance , moral hazard , actuarial science , liability , shareholder , reinsurance , quality (philosophy) , information asymmetry , accounting , finance , economics , law , incentive , microeconomics , philosophy , audit , epistemology , political science , market economy
We examine whether information about firms' directors' and officers' (D&O) liability insurance coverage provides insights into the likelihood of shareholder lawsuits. Using Canadian firms, we find evidence that firms with D&O insurance coverage are more likely to be sued and that the likelihood of litigation increases with increased coverage. These findings are consistent with managerial opportunism or moral hazard related to the insurance purchase decision. We also find that higher premiums are associated with the likelihood of litigation, indicating that insurers price this behavior. Taken together, the findings suggest that coverage and premium levels have the potential to convey information about lawsuit likelihood, and a firm's governance quality, to the marketplace.