Inherent virtue or inevitable evil : the effects of directors' and officers' insurance on firm value

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      <subfield code="a">Inherent virtue or inevitable evil</subfield>
      <subfield code="b">: the effects of directors' and officers' insurance on firm value</subfield>
      <subfield code="c">Derrick W. H. Fung, </subfield>
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      <subfield code="a">Whether directors' and officers' (D&O) insurance improves firrn value is a controversial issue. We perform a literature review about the effect of D&O insurance and find mixed results. The proponents of D&O insurance believe it enhances corporate monitoring and improves firm value, while the opponents of D&O insurance argue that it creates a moral hazard problem and diminishes firm value. Against this backdrop, we argue that the trade-off between the monitoring and moral hazard effects depends on the information acquired by the outside directors. Using a sample of listed Canadian firms, we find that (1) a change in D&O insurance coverage has no net effect on a firm's subsequent value when we ignore the information acquired by outside directors, (2) an increase in D&O insurance coverage improves a firm's subsequent value when the outside directors are well informed, and (3) an increase in D&O insurance coverage reduces a firm's subsequent value when the outside directors are poorly informed. Our findings are robust to endogeneity checks and have important implications for the regulation of D&O insurance</subfield>
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      <subfield code="d">Malden, MA : The American Risk and Insurance Association by Blackwell Publishing, 1999-</subfield>
      <subfield code="x">1098-1616</subfield>
      <subfield code="g">28/09/2018 Tomo 21 Número 2 - 2018 , p. 243-288</subfield>
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