Directors’ Insurance and the Expected Cost of Frivolous Litigation when Cross‐Listing into the U.S

We study the expected liability cost of cross‐listing into the United States by examining the change in the structure of a Canadian firm’s directors’ and officers’ liability insurance contract (D&O insurance) before and after cross‐listing. All else being equal, we show that neither the likelihood of having insurance nor the D&O liability insurance coverage change following cross‐listing. The D&O insurance premium and premium per dollar of coverage do change, however as both double following cross‐listing. As operations are unlikely to have changed dramatically from before to after cross‐listing, our results provide evidence that the increased litigation risk associated with being listed in the United States is due to an increase in the frequency rather than the severity of such litigation. As D&O insurers clearly update a firm’s expected litigation cost as a function of where its shares are traded, our results provide support for the view that D&O insurers have information that is relevant for investors. Martin Boyer is the CEFA Professor of Finance and Insurance, Département de finance, HEC Montréal (Université de Montréal); 3000, chemin de la Côte‐Ste‐Catherine, Montréal, QC H3T2A7; [email protected]; Phone: (514) 340‐6704; Fax: (514) 340‐5632. Martin Boyer thanks seminar and workshop participants at the University of New South Wales, the Melbourne Business School and Cornell University for comments and discussion, and especially Léa Stern, Ronald Masulis, Jonathan Jona, and François Derrien. Olivier Roy‐Durocher provided very able research assistance in the early stages of this paper. D&O insurance and cross‐listing