Directors and officers liability insurance: an analysis of determinants of disclosure

Abstract

In this paper, we investigate factors that explain the disclosure of Directors and officers liability (D&O) insurance. D&O insurance is used extensively in top management compensation. Surprisingly, only a handful of firms listed in the US disclose their D&O insurance practices (based on our extensive search of publicly available databases on corporate disclosure). Using a sample of firms from 2004 to 2008, we focus on level of competition, threat of increase in lawsuit, and internal governance to examine the determinants of the disclosure practices. Consistent with the hypothesis, the results show that firms in competitive industries, firms with a high threat of lawsuits, big firms, and firms with weak internal governance are less likely to disclose D&O insurance. We further find that variations in the scope and nature of disclosure are associated with the firms’ litigation risk and governance structure.