Directors' and Officers' Liability Insurance and Firm Value
Jun 01, 2018
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Journal of Risk and Insurance
Volume 85, Issue 2, June 2018, Pages 447-482

Hwang, J.H.(a) Kim, B.(b)
a Korea University Business School, South Korea
b Department of Business Administration, Dankook University, South Korea

This study examines the effect of directors' and officers' liability (D&O) insurance on firm value. Previous studies are divided on the value implication of D&O insurance: some argue for various benefits of being covered by D&O insurance, whereas others focus on the managerial opportunism stemming from being insured. In order to address whether D&O insurance increases firm value, we utilize a sample of quoted Korean companies from a period in which the disclosure of D&O insurance information was mandatory and there was a significant cross-sectional variation in the firms' coverage of D&O insurance. We find that controlling for the endogeneity of D&O insurance coverage, D&O insurance increases firm value compared to noninsured firms. We also find evidence that the increase in firm value is pronounced for firms with greater growth opportunities, which suggests that D&O insurance can help firms to better convert growth opportunities into higher firm value. © 2015 The Journal of Risk and Insurance