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Heterogeneous Beliefs and the Demand for D&O Insurance by Listed Companies

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  • Peter Egger
  • Doina Radulescu
  • Ray Rees

Abstract

type="main" xml:lang="en"> This article introduces a new rationale for the existence of “directors’ and officers” (D&O) insurance. We use a model with volatile stock markets where shareholders design compensation schemes that incentivize managers to stimulate short-term increases in stock prices that do not maximize long-run stock market value. We show that D&O insurance provides a convenient instrument for the initial shareholders of a company to take advantage of differences in beliefs between insiders and outsiders in capital markets. The empirical results support the idea that both the insurance coverage and the premium are higher in the presence of new shareholders and volatile markets. The results prove robust in various empirical model specifications.

Suggested Citation

  • Peter Egger & Doina Radulescu & Ray Rees, 2015. "Heterogeneous Beliefs and the Demand for D&O Insurance by Listed Companies," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 82(4), pages 823-852, December.
    • Handle: RePEc:bla:jrinsu:v:82:y:2015:i:4:p:823-852
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    References listed on IDEAS

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    1. Patrick Bolton & José Scheinkman & Wei Xiong, 2006. "Executive Compensation and Short-Termist Behaviour in Speculative Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(3), pages 577-610.
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    4. Lin, Chen & Officer, Micah S. & Zou, Hong, 2011. "Directors' and officers' liability insurance and acquisition outcomes," Journal of Financial Economics, Elsevier, vol. 102(3), pages 507-525.
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    6. Boyer, M. Martin & Stern, Léa H., 2012. "Is corporate governance risk valued? Evidence from directors' and officers' insurance," Journal of Corporate Finance, Elsevier, vol. 18(2), pages 349-372.
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    Cited by:

    1. Luo, Yan & Krivogorsky, Victoria, 2017. "The materiality of directors' and officers' insurance information: Case for disclosure," Research in Accounting Regulation, Elsevier, vol. 29(1), pages 69-74.
    2. Derrick W. H. Fung & Jason J. H. Yeh, 2018. "Inherent Virtue or Inevitable Evil: The Effects of Directors' and Officers' Insurance on Firm Value," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 21(2), pages 243-288, September.
    3. De-Lei Sheng & Linfeng Shi & Danping Li & Yanping Zhao, 2022. "Manage Pension Deficit with Heterogeneous Insurance," Methodology and Computing in Applied Probability, Springer, vol. 24(2), pages 1119-1141, June.
    4. Chiang, Yao-Min & Chang, Pang-Ru, 2022. "Overinvestment, ownership structure, and directors' and officers’ liability insurance," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 38-50.
    5. Li-Su Huang, 2022. "Directors and officers liability insurance and default risk," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 47(2), pages 375-408, April.

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    More about this item

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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