DIRECTORS' AND OFFICERS' LIABILITY INSURANCE AND FIRM VALUE

Abstract

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.