On the Corporate Demand for Directors' and Officers' Insurance

Abstract

Using data on directors' and officers' insurance policies gathered from a sample of Canadian firms, this article examines the determinants of firms' demand for D&O insurance. Firms with greater litigation risk are more likely to purchase insurance and carry higher limits and deductibles. The data do not support the hypothesis that director cash compensation substitutes for D&O insurance. Consistent with the hypotheses of Mayers and Smith (1982, 1987), firms with greater distress probability and utilities are more likely to purchase insurance and carry higher limits. However, firms with greater inside shareownership are less likely to purchase insurance and carry lower limits. Firms with greater inside voting control are more likely to purchase insurance and carry