Directors' and Officers' Liability Insurance, Corporate Risk and Risk Taking: New Panel Data Evidence on The Role of Directors' and Officers' Liability Insurance

Abstract

A BSTRACT This article develops and tests hypotheses regarding the relationship between directors’ and officers’ (D&O) insurance purchase and firm size, governance characteristics, and business risk, using a unique panel data set on Canadian firms for years 1996–2005. The data permit examination of the determinants of insurance pricing, ownership and coverage limits, and the effects of insurance on board characteristics and earnings management. Results using panel data methods and controlling for endogenous prices and endogenous selection into insurance ownership provide strong statistical evidence for the view that D&O insurance markets take corporate risk into account, but that insurance leads to greater risk taking.