Protecting Directors and Officers from Liability Arising from Aggressive Earnings Management

Directors’ and officers’ liability insurance and the cost of debt

Using hand-collected data on directors’ and officers’ liability insurance (D&O insurance), we analyze the effect of D&O insurance on the cost of debt. We find that higher levels of D&O insurance coverage are associated with higher at-issue bond yields (to maturity) and higher loan spreads. This evidence suggests that debtholders view D&O insurance coverage as increasing credit risk (potentially...

What Went Wrong with Directors' and Officers' Liability Insurance?

Directors' and officers' liability insurance and acquirer returns

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

In this paper, we develop and estimate models of the determinants of firms’ demand for directors’ and officers’ liability insurance. We add to and validate the existing empirical literature by testing hypotheses regarding the relationship between D&O insurance purchase and firm size, governance characteristics and business risk. Our data set allows us to test both purchase decisions and limits ...

Limited-liability Contracts with Earnings Management

Numerous principal-agent situations of interest to accounting involve limited liability by the agent. We explore this issue when the outcome is mutually observable (MOC) and when it is not and the contract is based instead on the agent’s report (NCC). We find that when outcome is not observable, the effect of limited lia bility depends on the level of limited liability: when low – no effect; wh...