Directors' and officers' liability insurance and loan spreads
Document Type
Journal article
Source Publication
Journal of Financial Economics
Publication Date
10-2013
Volume
110
Issue
1
First Page
37
Last Page
60
Publisher
Elsevier BV
Keywords
Directors' and officers' liability insurance, Loan spreads, Credit risk, Cost of debt financing
Abstract
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.
DOI
10.1016/j.jfineco.2013.04.005
Print ISSN
0304405X
Publisher Statement
Copyright © 2013 Published by Elsevier B.V.
Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Lin, C., Officer, M. S., Wang, R, & Zou, H. (2013). Directors' and officers' liability insurance and loan spreads. Journal of Financial Economics, 110(1), 37- 60. doi: 10.1016/j.jfineco.2013.04.005