Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/93483
Authors: 
Egger, Peter
Radulescu, Doina Maria
Rees, Ray
Year of Publication: 
2014
Series/Report no.: 
CESifo Working Paper 4621
Abstract: 
This paper introduces a new rationale for the existence of Directors' and Officers' (D&O) insurance. We use a model with volatile stock markets where shareholders design compensation schemes that incentivize managers to stimulate short-term increases in stock prices that do not maximize long run stock market value. We show that D&O insurance provides a convenient instrument for the initial shareholders of a company to take advantage of differences in beliefs between insiders and outsiders in capital markets. The empirical results support the idea that both the insurance coverage and the premium are higher in the presence of new shareholders and volatile markets. The results prove robust in various empirical model specifications.
Subjects: 
D&O insurance
volatile markets
credible protection
panel data models
JEL: 
G22
G30
C23
M52
Document Type: 
Working Paper

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