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Shareholder Wealth Effects of Directors' Liability Limitation Provisions

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  • Brook, Yaron
  • Rao, Ramesh K. S.

Abstract

The adoption of liability limitation provisions (LLPs) is associated with insignificant stock price reactions for all firms, but with positive stock price reactions for poorly performing firms. This result is consistent with the hypothesis that the net benefit of LLPs is larger for financially troubled firms than for other firms because outside directors are valuable to the distressed firm and LLPs substantially affect experts' expected costs of serving as directors of troubled firms.

Suggested Citation

  • Brook, Yaron & Rao, Ramesh K. S., 1994. "Shareholder Wealth Effects of Directors' Liability Limitation Provisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(3), pages 481-497, September.
    • Handle: RePEc:cup:jfinqa:v:29:y:1994:i:03:p:481-497_00
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    Cited by:

    1. Chang, Shih-Chung & Ren, Yayuan & Yeh, Jason, 2018. "The role of information: When is Directors’ and Officers’ insurance value-added?," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 189-197.
    2. Lin, Chen & Officer, Micah S. & Schmid, Thomas & Zou, Hong, 2019. "Is skin in the game a game changer? Evidence from mandatory changes of D&O insurance policies," Journal of Accounting and Economics, Elsevier, vol. 68(1).
    3. Zou, Hong & Wong, Sonia & Shum, Clement & Xiong, Jun & Yan, Jun, 2008. "Controlling-minority shareholder incentive conflicts and directors' and officers' liability insurance: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2636-2645, December.
    4. Agrawal, Vipin & Kothare, Meeta & Rao, Ramesh K. S. & Wadhwa, Pavan, 2004. "Bid-ask spreads, informed investors, and the firm's financial condition," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(1), pages 58-76, February.
    5. Wang, Yuwei & Chen, Chia-wei, 2016. "Directors' and officers' liability insurance and the sensitivity of directors' compensation to firm performance," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 286-297.
    6. Yaniv Grinstein & Stefano Rossi, 2016. "Good Monitoring, Bad Monitoring," Review of Finance, European Finance Association, vol. 20(5), pages 1719-1768.
    7. Keldon Bauer, 2009. "Conflicts Of Interest On The Board Of Directors Of Non‐Profit Hospitals: Theory And Evidence," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 80(3), pages 469-497, September.
    8. M. Martin Boyer, 2004. "Is the Demand for Corporate Insurance a Habit? Evidence of Organizational Inertia from Directors' and Officers' Insurance," CIRANO Working Papers 2004s-33, CIRANO.
    9. Boyer, Martin, 2014. "Directors’ and officers’ insurance and shareholder protection," Journal of Financial Perspectives, EY Global FS Institute, vol. 2(1), pages 107-128.
    10. Park, Min, 2018. "What drives corporate insurance demand? Evidence from directors' and officers' liability insurance in Korea," Journal of Corporate Finance, Elsevier, vol. 51(C), pages 235-257.
    11. Bradley, Michael & Chen, Dong, 2011. "Corporate governance and the cost of debt: Evidence from director limited liability and indemnification provisions," Journal of Corporate Finance, Elsevier, vol. 17(1), pages 83-107, February.
    12. M. Martin Boyer & Amandine Hanon, 2009. "Protecting Directors and Officers from Liability Arising from Aggressive Earnings Management," CIRANO Working Papers 2009s-35, CIRANO.
    13. Aguir, Iness & Burns, Natasha & Mansi, Sattar A. & Wald, John K., 2014. "Liability protection, director compensation, and incentives," Journal of Financial Intermediation, Elsevier, vol. 23(4), pages 570-589.
    14. M. Martin Boyer, 2003. "Is the Demand for Corporate Insurance a Habit? Evidence from Directors' and Officers' Insurance," CIRANO Working Papers 2003s-42, CIRANO.
    15. M. Andrew Fields & Phyllis Y. Keys, 2003. "The Emergence of Corporate Governance from Wall St. to Main St.: Outside Directors, Board Diversity, Earnings Management, and Managerial Incentives to Bear Risk," The Financial Review, Eastern Finance Association, vol. 38(1), pages 1-24, February.
    16. Chia-Chung Chan & Yung-Ho Chang & Chia-wei Chen & Yuwei Wang, 2019. "Directors’ liability insurance and investment-cash flow sensitivity," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(1), pages 27-43, January.
    17. Li, Tianshi & Yang, Tina & Zhu, Jigao, 2022. "Directors’ and officers’ liability insurance: Evidence from independent directors’ voting," Journal of Banking & Finance, Elsevier, vol. 138(C).
    18. Danielson, Morris G. & Karpoff, Jonathan M., 1998. "On the uses of corporate governance provisions," Journal of Corporate Finance, Elsevier, vol. 4(4), pages 347-371, December.
    19. Aguir, Iness & Aguir, Wael, 2020. "Director and officer liability protection and firm value: Unintended consequences," Finance Research Letters, Elsevier, vol. 32(C).
    20. Guan, Yuyan & Zhang, Liandong & Zheng, Liu & Zou, Hong, 2021. "Managerial liability and corporate innovation: Evidence from a legal shock," Journal of Corporate Finance, Elsevier, vol. 69(C).

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