Directors' and officers' liability insurance and loan spreads

Chen LIN, Micah S. OFFICER, Rui WANG, Hong ZOU

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

38 Citations (Scopus)

Abstract

We analyze the effect of directors' and officers' liability insurance (DandO insurance) on the spreads charged on bank loans. We find that higher levels of DandO 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 DandO insurance coverage is robust to controlling for endogeneity (because both could be related to firm risk). Our evidence suggests that lenders view DandO insurance coverage as increasing credit risk (potentially via moral hazard or information asymmetry). Further analyses show that higher levels of DandO insurance coverage are associated with greater risk taking and higher probabilities of financial restatement due to aggressive financial reporting. While greater use of DandO insurance increases the cost of debt, we find some evidence that DandO insurance coverage appears to improve the value of large increases in capital expenditure for firms with better internal and external governance.
Original languageEnglish
Pages (from-to)37-60
Number of pages24
JournalJournal of Financial Economics
Volume110
Issue number1
Early online date11 Apr 2013
DOIs
Publication statusPublished - Oct 2013
Externally publishedYes

Fingerprint

Liability insurance
Loans
Cost of debt
Firm risk
Moral hazard
Risk taking
Financial restatements
Endogeneity
Capital expenditures
Monitoring
Information asymmetry
Financial reporting
Credit risk
Governance
Bank loans

Bibliographical note

Financial support provided from the Research Grants Council of the Hong Kong Special Administrative Region, China (Project No. T31/717/12R) and a GRF grant from Research Grants Council of the Hong Kong Special Administrative Region, China (Project No. 154811).

Keywords

  • Cost of debt financing
  • Credit risk
  • Directors' and officers' liability insurance
  • Loan spreads

Cite this

LIN, Chen ; OFFICER, Micah S. ; WANG, Rui ; ZOU, Hong. / Directors' and officers' liability insurance and loan spreads. In: Journal of Financial Economics. 2013 ; Vol. 110, No. 1. pp. 37-60.
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Directors' and officers' liability insurance and loan spreads. / LIN, Chen; OFFICER, Micah S.; WANG, Rui; ZOU, Hong.

In: Journal of Financial Economics, Vol. 110, No. 1, 10.2013, p. 37-60.

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

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