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The Demand for Directors' and Officers' Insurance by Large UK Companies

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  • O'Sullivan, Noel

Abstract

This paper investigates why large public companies in the UK purchase liability insurance for their directors and officers (D&O). Previous research suggests that companies may purchase D&O insurance for three reasons: (1) as part of their corporate insurance programme, (2) due to demand from directors, and (3) as part of an optimal governance arrangement. This study tests each of these hypotheses on a sample of large UK companies. The empirical analysis is facilitated by UK legislation obliging companies to disclose the existence of a corporate-funded D&O policy. The empirical analysis finds that insured companies are larger, are more exposed to US litigation, experience greater share price risk, exhibit lower levels of managerial ownership, and possess greater non-executive representation on their boards than uninsured companies. These findings provide some support for all three motivations for possessing D&O insurance but the demands of individual directors and governance seem particularly important.

Suggested Citation

  • O'Sullivan, Noel, 2002. "The Demand for Directors' and Officers' Insurance by Large UK Companies," European Management Journal, Elsevier, vol. 20(5), pages 574-583, October.
    • Handle: RePEc:eee:eurman:v:20:y:2002:i:5:p:574-583
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    Cited by:

    1. 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.
    2. Boubakri, Narjess & Bouslimi, Lobna, 2016. "Directors’ and officers’ liability insurance and analyst forecast properties," Finance Research Letters, Elsevier, vol. 19(C), pages 22-32.
    3. O'Sullivan, Noel, 2009. "The impact of directors’ and officers’ insurance on audit pricing: Evidence from UK companies," Accounting forum, Elsevier, vol. 33(2), pages 146-161.
    4. Li, Kuei-Fu & Liao, Yi-Ping, 2014. "Directors' and officers' liability insurance and investment efficiency: Evidence from Taiwan," Pacific-Basin Finance Journal, Elsevier, vol. 29(C), pages 18-34.
    5. Lai, Yi-Hsun & Tai, Vivian W., 2019. "Managerial overconfidence and directors' and officers' liability insurance," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).

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