Premium Inherent Virtue or Inevitable Evil: The Effects of Directors' and Officers' Insurance on Firm ValuePremium
Fung Derrick W. H.,
Yeh Jason J. H.
risk management and insurance review
Abstract Whether directors’ and officers’ (D&O) insurance improves firm value is a controversial issue. We perform a literature review about the effect of D&O insurance and find mixed results. The proponents of D&O insurance believe it enhances corporate monitoring and improves firm value, while the opponents of D&O insurance argue that it creates a moral hazard problem and diminishes firm value. Against this backdrop, we argue that the trade‐off between the monitoring and moral hazard effects depends on the information acquired by the outside directors. Using a sample of listed Canadian firms, we find that (1) a change in D&O insurance coverage has no net effect on a firm's subsequent value when we ignore the information acquired by outside directors, (2) an increase in D&O insurance coverage improves a firm's subsequent value when the outside directors are well informed, and (3) an increase in D&O insurance coverage reduces a firm's subsequent value when the outside directors are poorly informed. Our findings are robust to endogeneity checks and have important implications for the regulation of D&O insurance.
Subject(s)accounting , actuarial science , business , casualty insurance , computer science , econometrics , economics , endogeneity , enterprise value , general insurance , group insurance , incentive , income protection insurance , insurance policy , machine learning , microeconomics , moral hazard , property insurance , value (mathematics)
SCImago Journal Rank0.386
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