Journal of Accounting and Economics Vol. 61 No. 1 2016
Directors׳ and officers׳ liability insurance and the cost of equity
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.
- DOI
- 10.1016/j.jacceco.2015.04.001
- Volume
- 61
- Issue
- 1
- Pages
- 100-120
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib