Directors׳ and officers׳ liability insurance and the cost of equity

• Autores: Zhihong Chen, Oliver Zhen Li, Hong Zou
• Localización: Journal of accounting and economics, ISSN 0165-4101, Vol. 61, Nº. 1, 2016, págs. 100-120
• Idioma: inglés
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• Resumen

  • Abstract We examine whether directors׳ and officers׳ (D&O) liability insurance affects a firm’s cost of equity. We find a positive association between D&O insurance and the cost of equity. Information quality and risk-taking appear to be two underlying channels through which D&O insurance affects the cost of equity. Further tests suggest that this positive association is not due to optimal risk-taking, as evidenced by a negative market reaction to an increase in D&O insurance coverage, a lack of improvement in firms׳ cash flow and a low valuation associated with high D&O insurance. Overall, our evidence is consistent with the notion that D&O insurance weakens the disciplining effect of shareholder litigation, leading to an increase in the cost of equity.