Directors' and officers' liability insurance and loan spreads

By Chen Lin, Micah S. Officer, Rui Wang, H. Zou. 2013

181 citations recorded by the source corpus.

We analyze the effect of directors' and officers' liability insurance (D&O insurance) on the spreads charged on bank loans. We find that higher levels of D&O insurance coverage are associated with higher loan spreads and that this relation depends on loan characteristics in economically sensible ways and is attenuated by monitoring mechanisms. This association between loan spreads and D&O insurance coverage is robust to controlling for endogeneity (because both could be related to firm risk). Our evidence suggests that lenders view D&O insurance coverage as increasing credit risk (potentially via moral hazard or information asymmetry). Further analyses show that higher levels of D&O insurance coverage are associated with greater risk taking and higher probabilities of financial restatement due to aggressive financial reporting. While greater use of D&O insurance increases the cost of debt, we find some evidence that D&O insurance coverage appears to improve the value of large increases in capital expenditure for firms with better internal and external governance.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/d0669d829103ba33876d8ce348f5992797b369fa

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

1. Zhihong Chen
2. H. Zou
3. Rongli Yuan
4. Wen Wen

In Economics and Econometrics

1. Zhihong Chen
2. H. Zou
3. Rongli Yuan
4. Wen Wen

In Finance

1. H. Zou
2. Zhihong Chen

Citations in the corpus

• Directors׳ and officers׳ liability insurance and the cost of equity☆ (2016, background): “…2006), reporting conservatism (Chung and Wynn, 2008), management forecasts (Wynn, 2008), investment decisions (Lin et al., 2011) and loan financing (Lin et al., 2013), we document how D&O insurance affects the cost                                                              2 This point is…”