Top PDF Predicting Corporate Governance Risk: Evidence from the Directors\u27 & Officers\u27 Liability Insurance Market

Predicting Corporate Governance Risk:  Evidence from the Directors\u27 & Officers\u27 Liability Insurance Market

Predicting Corporate Governance Risk: Evidence from the Directors\u27 & Officers\u27 Liability Insurance Market

tt Associate Professor of Law, Fordham Law School. For their comments and suggestions on earlier drafts, the authors thank Phillip Blumberg, Anne Dailey, Sean Fitzpatrick, L[r]

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What Matters in Corporate Governance? Evidence from the Directors and Officers Liability Insurance Market * Stuart L. Gillan Texas Tech University

What Matters in Corporate Governance? Evidence from the Directors and Officers Liability Insurance Market * Stuart L. Gillan Texas Tech University

Aspects of the association between governance and D&O insurance have been studied previously. However, the evidence as to what elements of governance are important in the context of D&O insurance is somewhat mixed. For example, Core (2000) explicitly focuses on the association between governance characteristics and D&O pricing. Using a cross-section of 110 Canadian firms with D&O coverage in the early 1990’s, a period prior to governance reforms, he finds that insurance premiums are higher when insiders have more voting control, when inside ownership is lower, and when boards are less independent. Core also reports that the presence of: senior executive employment contracts, golden parachutes, and the presence of a staggered board, poison pill, or other takeover restriction are associated with increased premiums. On balance, Core concludes that liability insurance is priced to reflect the firm’s business risk and the quality of its governance structures.
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Litigation Risk, Judicial Transparency and Directors’ and Officers’ Liability Insurance

Litigation Risk, Judicial Transparency and Directors’ and Officers’ Liability Insurance

It expands the research category. Existing literature study for D&O insurance is mainly focused on the effect on corporate governance, there is little literature explaining the demand motivation of D&O insurance. This paper is connected with special legal envi- ronment in China, exploring the demand motivation of D&O insurance from the em- pirical perspective for the first time. The study found that the demand of D&O insur- ance was affected by the risk of litigation and legal environment play a positive role in regulating, which made the research content of D&O insurance richer and the theory more perfect. 2) It enriches the research field of litigation risk. The current litigation risk research is still at the early stage. Existing literature is mainly focused on the factors of litigation risk and lawsuit risk approach. Based on the different judicial transparency level and from the Angle of the demand of D&O insurance, this paper combined litiga- tion risk with corporate governance and studied the mechanism of action of litigation risk. In addition, different from the measurement of the legal environment during the past time, this paper uses the latest judicial transparency index which was published by Chinese academy of social sciences to measure the regional differences of legal envi- ronment. This paper empirically studies the deep influence it has on the relationship between litigation risk and D&O insurance from the Angle of judicial transparency, which also enriches the research theory and contents of the “law and finance”. 3) D&O insurance has been quite popular in Europe and the United States and other western countries, becoming the important tool of enterprise to manage risk. However, com- pared with these countries, although the D&O insurance has been introduced into the capital market in China for more than ten years, enterprises’ enthusiasm is not high and attention degree is not enough. Combining with the judicial transparency, this pa- per explains the demand motivation of D&O insurance from the perspective of litiga- tion risk. The conclusion of the research provides policy Suggestions for the develop- ment and popularization of D&O insurance in our country.
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Directors' and officers' liability insurance and acquirer returns

Directors' and officers' liability insurance and acquirer returns

of D&O insurance information for outside investors in assessing risks related to governance structures of a firm. There is a lot of evidence that the amount of D&O insurance coverage a firm purchases affects the behavior of its management team. Furthermore, there is evidence that D&O insurance premium includes information that is not otherwise available in the market, and that it can be used as a better proxy for the quality of corporate governance than other measures available at the moment. Therefore, my results have important policy implications in countries that do not require D&O insurance information disclosure. They are particularly important in the US, since my results take into account firms that are listed in there. My study provides empirical support for requiring firms to disclose their D&O insurance information, which Baker and Griffith (2007) have advocated for using qualitative evidence from extensive interviews and surveys, and Kang and Klausner (2011) by studying the relation between D&O insurance information and CEO overcompensation. Thus, as D&O insurance information signals the behavior of the management team and the quality of a firm’s governance, it is logical to ask why this signal is not already being sent. Baker and Griffith (2007) suggest three possible reasons: Comparative information, free-riding and first mover disadvantage, and fear of attracting nuisance suits are the main concerns hindering the disclosure of D&O details. First, they point out that the value of D&O policy information is purely comparative. Relevance of a firm’s D&O insurance premium and payout limits emerges only upon comparison with similar firms. For example, by taking a broad industry-wise sample and controlling for variables such as market capitalization and volatility. My results support Kang and Klausner (2011) by showing that per dollar premium serves as a decent substitute for the quality of governance structure.
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Directors and Officers Liability Insurance, Independent Director Behavior. and Governance Effects

Directors and Officers Liability Insurance, Independent Director Behavior. and Governance Effects

6. Additional Analyses In this section, we conduct several additional analyses to further corroborate the main findings reported so far. We first attempt to address the endogeneity concern that omitted variables correlated with both D&O insurance purchase decision and independent director behavior could bias our results. Reverse causality may be another concern. It is possible that the demand for D&O insurance is higher for firms with lax board monitoring and poor corporate governance that expose firm insiders to higher litigation risk. We address endogeneity in Section 6.1 using the instrumental variable approach with two-stage least squares (2SLS). Apart from endogeneity, one may also be concerned with self-selection bias to the extent that a firm’s decision to purchase D&O insurance is non-random. We address this concern in Section 6.2 with Heckman (1979) two-stage approach. Results reported in the main tests are based on firm-year observations and do not take into consideration independent director personal characteristics. In section 6.3, we collect information on individual director characteristics and repeat all analyses at the directorship level. Finally, to gauge the net merits of D&O insurance as perceived by shareholders, in section 6.4, we examine the stock market reaction to the announcement of D&O insurance purchase using the event study methodology.
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DOES MANDATORY DISCLOSURE OF DIRECTORS AND OFFICERS LIABILITY INSURANCE CURB MANAGERIAL OPPORTUNISM? EVIDENCE FROM THE CANADIAN SECONDARY MARKET

DOES MANDATORY DISCLOSURE OF DIRECTORS AND OFFICERS LIABILITY INSURANCE CURB MANAGERIAL OPPORTUNISM? EVIDENCE FROM THE CANADIAN SECONDARY MARKET

To examine how the governance structure of the firm affects D&O insurance, we rely on four corporate governance variables: (a) Firms with a large board size are more likely to purchase higher amounts of D&O insurance and pay higher premiums, as larger boards may increase agency problems (see Yermack (1996)). An alternative hypothesis could be that larger boards may bring together specialists from various functional areas, which will, in turn, increase firm value (Beiner et al. (2006)). Under this alternative hypothesis, firms with large boards will have less need to carry higher D&O insurance coverage limits and to pay higher premiums. The purchase of D&O insurance can improve the monitoring role of public companies’ shareholders (e.g. Holderness (1990), Daniel and Hutton (1993), and O’Sullivan (1997)). (b) Outside directors can be considered as an alternative monitoring mechanism, we expect the amount of D&O insurance coverage and premium to be negatively related to the number of outside directors. A high D&O ownership will work on mitigating the agency problems, and we expect it to alleviate managerial opportunism as well as D&O insurance needs. (c) The percentage of common shares held by blockholders can help shareholders to effectively monitor the firm’s managers (Schleifer and Vishny (1986)). Hence, we expect firms with blockholders to exhibit less need for D&O insurance. (d) D&O insurance is
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Directors' and officers' liability insurance and loan spreads

Directors' and officers' liability insurance and loan spreads

Panel A presents the summary statistics for firm risk measures and t-tests for differences in means for low and high D&O insurance coverage groups. The low (high) coverage group is defined as having insurance coverage ratio below (above) the median of the insurance coverage ratio distribution in the sample with insurance coverage and risk data. Total risk is the natural logarithm of the annualized variance of daily percentage returns over the fiscal year. Idiosyncratic risk is the natural logarithm of the annualized variance of the residuals from the market model. All other variables are defined in Table 1. Panel B shows the results from regressing firm risk on the D&O insurance coverage ratio. The sample used in the analysis is the intersection of the D&O insurance sample, Compustat, Datastream share prices, and corporate governance variables. Coverage and all control variables are lagged by one year relative to risk measures. OLS indicates ordinary least squares regressions while FE indicates regressions with firm fixed effects. IV indicates instrumental variables regressions in which the D&O insurance coverage ratio is instrumented with fitted values from a first-stage regression on the industry/year median insurance coverage ratio (based on Fama and French 30 industry classifications) and the control variables. Shea’s (1997) partial R 2 is a measure of instrumental variable (IV) relevance. The first-stage F-test is the test of excluded IV in the first-stage regression. Standard errors (clustered at the firm level) that are robust to both cross-sectional heteroskedasticity and within-firm serial correlation are used in computing t-statistics (in square brackets). The coefficients on the constant, and year, industry, and firm fixed effects are omitted for brevity. Panel C presents the results from median regression of changes in risk measures on changes in insurance coverage and changes in other firm-level characteristics. In all panels * , ** , or *** indicates that the coefficient (or statistic) is statistically significantly different from zero at the 0.10, 0.05, or 0.01 level using a two-tailed t-test, respectively.
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Implications of Auditor Characteristics and Directors and Officers Liability Insurance for Going-Concern Audit Opinions: Evidence from Taiwan

Implications of Auditor Characteristics and Directors and Officers Liability Insurance for Going-Concern Audit Opinions: Evidence from Taiwan

In other words, we hypothesize that, compared to auditors with less reputation cost and litigation risk, auditors with higher reputation cost and litigation risk will be more likely to suggest that their client purchase D&O insurance. Furthermore, Casterella, Jensen, and Knechel (2010) indicate that the characteristics of audit firms can lead to different litigation risks and suggest that audit firms with larger size, higher growth rate, and experienced sanction have higher litigation risk. For the reputation cost of auditors, compared to non-specialist auditors and auditors with smaller size, less market share, or less audit experience, specialist auditors have invested greater resources in their clients, and are likely to experience greater losses from the audit failure. However, from the perspective of corporate governance, since the specialization and experience of auditors may increase audit quality, they may reduce the D&O insurance cost as a result. Consequently, rather than expect the directions, we only hypothesize that firm size, industry specialization, market shares, and sanction experience of auditors are associated with the purchase of their clients’ D&O insurance. The hypothesis is proposed as follows: H1: Auditor characteristics are associated with the D&O insurance taken out by their clients.
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MANAGERIAL OPPORTUNISM IN ACCOUNTING CHOICE: EVIDENCE FROM DIRECTORS' AND OFFICERS' LIABILITY INSURANCE PURCHASES

MANAGERIAL OPPORTUNISM IN ACCOUNTING CHOICE: EVIDENCE FROM DIRECTORS' AND OFFICERS' LIABILITY INSURANCE PURCHASES

We use three categories of independent variables: SEO characteristics, business risk variables, and corporate governance variables. We control for two issue characteristics: The offering size and the fraction of firm sold. We follow the literature and rely on five business-risk variable. Because the firm financing policy is likely to affect the demand of corporate insurance, we control for the firm leverage. Indeed, since distressed firms tend to exhibit a higher litigation risk and larger bankruptcy costs, leverage is a potential determinant for D&O insurance demand. Therefore, we expect that a more leveraged firm is more likely to carry a higher D&O insurance limit and pay a higher premium. Since a firm’s past performance should be a reliable signal of its future performance, we expect firms for which past information is good and reliable to have amore stable corporate governance structure and lower litigation risk. As a result, we anticipate coverage and premium are negatively associated with the firm’s past revenues (good information) and firm age (reliable information). For the same reasons, we expect a positive relation between revenue volatility as measured by the standard deviation of revenues and D&O insurance coverage and premium. 15 Since liability risks differ
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20 Questions Directors Should Ask about Directors and Officers Liability Indemnification and Insurance

20 Questions Directors Should Ask about Directors and Officers Liability Indemnification and Insurance

negotiations, before the policy proceeds have been eroded by defence costs. At the outset of a claim, the first priority of the insureds will typically be to ensure that they have defence counsel in place and that sufficient funding is available for the defence. They may find themselves pressed by the insurer to discuss coverage matters, to accept a reservation of rights or sign a non-waiver agreement, or to enter into a defence funding agreement that might limit their rights against the insurer. Insurers almost always issue a reservation of rights letter or ask the insured to sign a non-waiver agreement, to the effect that the insurer may investigate or even defend the claim without becoming committed to cover it in the event the claim succeeds. Typically the insureds will be dealing with a lawyer on the staff of the insurer, or outside counsel acting for the insurer, who will be very familiar with coverage matters, and will usually have firm views on the coverage issues. The insurer’s views on these matters will not necessarily be firmly grounded in the case law, since many of the coverage issues under these policies have not yet been addressed by the courts to any extent, even in the United States. It is not uncommon for insureds to consult independent legal counsel from the outset of a claim to assist them in getting matters off on the right foot with the insurer and in dealing with the insurer as the claim evolves.
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The Corporate Governance–Risk Taking Nexus: Evidence from Insurance Companies

The Corporate Governance–Risk Taking Nexus: Evidence from Insurance Companies

The purpose of CG mechanisms, therefore, is to moderate agency problems and confirm that managers’ performance is in line with shareholders’ interests (e.g., Nahar et al., 2016; Rashid & Islam, 2014). The Cadbury Code in the UK recommends a set of significant methods for bringing the actions of managers into line with shareholders’ interests. These include, for example, improving the responsibility and transparency of companies. The active construction of CG codes for the UK was designed to support the involvement of non- executive directors and encourage audit committees to embrace their responsibilities because of their outside knowledge and skills (Fama & Jensen, 1983). Similarly, agency theory argues that the board of directors has a monitoring function; it is able to provide active observation of executive directors and to launch strategies which will accordingly be capable of benefitting the shareholders. Therefore, a board is regarded as a key tool which can indicate the success of a firm. Hence, CG best practices are organised to safeguard the boards’ actions and tasks from any unregulated influence, and to consequently decrease 3
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Directors and Corporate Governance in the Banking Sector: Evidence from Nigeria

Directors and Corporate Governance in the Banking Sector: Evidence from Nigeria

They also acknowledge that effective oversight of executive management by the board by knowledgeable directors in business financial matters would contr i bute to improve the state[r]

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Group management Board of Directors Elected officers Corporate governance Risk management and capital allocation...

Group management Board of Directors Elected officers Corporate governance Risk management and capital allocation...

Assets recognised at fair value through profit and loss will mainly be securities traded in an active market. An active market is defined as a market for trading of similar products where willing buyers and sellers are present at all times, and where prices are accessible to the general public. Shares quoted in a regulated market place fit in with the definition of an active market. A market with a large spread between bid and asked prices and where trading is quiet may pose a challenge. Some key shares will be based on in-house valuations, transaction prices or external analyses of the company. Such shares are valued using acknowledged valuation techniques. These include the use of discounted cash flows or comparative pricing where similar, listed, companies are used (multiple pricing) to determined the value of the unlisted company. Such assets could be encumbered with uncertainty. Assets classified as available for sale will also be recognised at fair value through other comprehensive income. Market values will generally be based on valuations or the latest known trade of the share. Shares which cannot be reliably valued will be carried at cost price.
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Zurich Corporate Directors & Officers Liability Insurance: Zurich D&O Select. Raising the bar

Zurich Corporate Directors & Officers Liability Insurance: Zurich D&O Select. Raising the bar

Every member of our dedicated D&O claims team is an attorney, with broad knowledge and experience in the complexities of this protection and today’s legal and regulatory environment. To assure a complete understanding of each customer’s particular circumstances, every Corporate D&O customer is assigned a single point of contact for claims, to help assure that we recognize and respond to our customer’s unique needs.

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Managerial Opportunism? Evidence from Directors and Officers Insurance Purchases

Managerial Opportunism? Evidence from Directors and Officers Insurance Purchases

The final variable in regressions ~2! through ~4! is designed to test whether the insurer anticipates and prices future abnormal performance or risk when managers buy an unusual amount of insurance. All variables are interactions between the unexplained portion of total coverage and one of our proxies for the private information of the managers. The insignificant coefficients on each of the long-run stock return interaction variables suggest that extra coverage is not more expensive for managers of firms that subsequently do poorly. From these results, we infer that insurers pool all types of excess coverage purchasers together and do not attempt, or are unable, to distinguish among those with negative private information and those that purchase extra cov- erage for some other reason, such as exceptional aversion to risk by the directors and officers. These latter firms appear to be subsidizing extra insur- ance purchases by opportunistic managers. Thus, we conclude that, while in- surers do appear to price the unexplained coverage, the pricing is not related to the future returns measures that we use as proxies for managers’ private information. Surprisingly, the coefficient on standard deviation of returns is significantly negative—opposite of what would be predicted if insurers charged more to ex post riskier firms. We have no explanation for this puzzling result. However, insurers do appear to react differently to firms who purchase abnormally high coverage and are subsequently sued. Regression ~ 5 ! presents a specification that interacts abnormal coverage with a dummy variable set equal to one if the firm is a defendant in securities litigation during the post-IPO return measurement period. This result suggests that insurers are able to identify firms with abnormal litigation risk and price that risk.
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Directors & Officers Liability

Directors & Officers Liability

“Let’s say the developer sits on the board with two other people. He hasn’t completely transitioned the community over to the HOA,” said Angeli. “And let’s say the developer makes a decision about the community with the other board members that result in a lawsuit. The insurance company is going to cover everybody except the developer. They’re going to exclude him, which is a huge gap when he’s making decisions for the community. You can have the developer acting on the board for years.”

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Directors and Officers Liability Insurance in Bankruptcy Settings What Directors and Officers Really Need to Know

Directors and Officers Liability Insurance in Bankruptcy Settings What Directors and Officers Really Need to Know

Corporations organized in Delaware are generally authorized under their charters or bylaws to advance defense costs or indemnify their directors and officers for lawsuits commenced against them, or which have been settled. However, if the Corporation is in bankruptcy, it may be unable to advance or indemnify Losses associated with these settlements, either because it cannot afford to do so or because it cannot, as required under title 11 of the United States Code (the “Bankruptcy Code”), get approval from key constituents and ultimately the bankruptcy court to make such payments. Side A coverage is particularly important in these situations, especially because a Corporation’s chapter 11 filing is often a catalyst for litigation against the Corporation’s directors and officers. For example, shareholder derivative actions, by which a shareholder or group of shareholders of a corporate debtor brings an action against the directors or officers of the debtor for a breach of fiduciary duty, are common when a Corporation is in bankruptcy. Another example is when a chapter 11 filing is caused by reports of accounting irregularities in the Corporation’s financial statements. In such cases, it is typical for a securities class action lawsuit to be filed against the Corporation and its directors and officers, either before or after the Corporation files its chapter 11 petition. The litigants in the securities class action suit typically claim that they, as shareholders, relied on publicly filed financial statements that were fraudulently maintained by the Corporation’s directors and officers. In such a lawsuit, the insurance carrier will generally be required under the Side A provisions of the Corporation’s D&O policy (subject to its other terms and conditions and limitations), to pay the director’s or officer’s defense costs and directly fund litigation settlements without the need to satisfy the specified Retention in the D&O Policy that must be paid by the Corporation before the D&O Policy is authorized to respond to Losses.
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Corporate Governance, Accounting Information Quality, and Cost of Equity Capital an Indonesia\u27 Evidence

Corporate Governance, Accounting Information Quality, and Cost of Equity Capital an Indonesia\u27 Evidence

Information asymmetry creates a moral hazard problem when managers have incentives to follow their own interests at shareholder expense. Self-interested managerial behavior can take several forms including shirking, consumption of perquisites, overcompensation, and empire building, all of which increase agency risk. Information asymmetry also creates an adverse selection problem when investors cannot detect the true economic value of the firm that is partially a function of the indistinguishable quality of management. Imperfect information on management quality and a firm‘s economic value results in greater agency risk being imposed on the shareholder. Corporate governance encompasses a broad spectrum of mechanisms intended to mitigate moral hazard and adverse selection problems, that is, agency risk, by increasing the monitoring of managements‘ actions and limiting managers‘ opportunistic behavior (Skaife et al., 2004). Prior research conceives that quality financial information reduces firm risk and, consequently, the cost of equity by increasing market liquidity, thereby reducing transactions costs or increasing the demand for a firm‘s securities (Diamond & Verrecchia, 1991).
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ATEP Directors\u27 and Atcs\u27 Perceptions of the Psychosocial Intervention and Referral Competencies

ATEP Directors\u27 and Atcs\u27 Perceptions of the Psychosocial Intervention and Referral Competencies

Overall, it was found that ATCs and ATEP directors rated the importance, criticality, and preparedness of the Psychosocial Intervention and Referral competencies similarly. Even though there were no significant differences within the one-tailed independent T-tests, two differences occurred between these groups in the 7 th and 10 th competencies. These two competencies deal with the referral process to other health care providers and psychological factors associated with common eating disorders. These findings suggest that ATEP directors feel that the 7 th and 10 th competencies are more essential to the job performance of an ATC than clinically practicing ATCs do. With this, ATEP directors may feel that these two competencies are more important because of their position and their previous experiences. On the other hand, ATCs may not perceive these competencies as important due to their lack of education, experience, and preparation within this area.
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CONTENTS. Directors and Officers liability in Switzerland SWITZERLAND

CONTENTS. Directors and Officers liability in Switzerland SWITZERLAND

A N D The burden of proof for these pre-conditions of liability lies with the claimant (except for the cases of contractual liability where negligence is presumed by the law and the defendant has to prove that no fault was attributable to him). Liability triggers the obligation to indemnify the damaged party for the actual loss such party has suffered. The loss is calculated according to the so-called theory of balance (Differenztheorie): the difference between the damaged party’s assets before and after the action (or omission) which caused the loss. The judge may take into account special circumstances (in particular circumstances which helped to give rise to or compound the loss and which are attributable to the damaged party) and the degree of culpability of the wrongdoer. This may lead to a reduction of the compensation due. On the other hand, the compensation must not exceed the actual loss suffered by the damaged party. Multiple or punitive damages are unknown to Swiss law.
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