BOARD STRUCTURE, D&O INSURANCE AND THE VARIABILITY OF FIRM PERFORMANCE

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Yuwei Wang, Chia-wei Chen

DOI:10.22495/cocv12i1c2p4

Abstract

We examine the relation between the disclosure of Directors’ & Officers’ (D&O) Liability insurance and the variability of firm performance. Our results show D&O insurance is positively correlated with the variability of firm performance. Specifically, the evidence shows a one percent increment in D&O insurance coverage will lead to a 0.31, 30, and 0.0008 percent increase in the variability of corporate performance measured in monthly stock returns, annual accounting returns on assets (ROA), and Tobin’s Q respectively. Therefore, instead of reducing risk, the findings of this paper suggest D&O insurance may actually increase firm risk, which is very different from the essential purpose of implementing this insurance.

Keywords: Directors’ and Officers’ Liability Insurance, D&O Insurance, Corporate Governance, Variability of Firm Performance, Moral Hazard, Taiwan

How to cite this paper: Wang, Y., & Chen, C. W. (2014). Board structure, D&O insurance and the variability of firm performance. Corporate Ownership & Control, 12(1-2), 259-270. http://doi.org/10.22495/cocv12i1c2p4