Abstract
In recent times, there has been evidence of abnormal Directors and Officers liability (D&O) insurance purchase by the firms. Although D&O coverage is necessary to protect the directors and officers from the rising lawsuit risk, the motivation for carrying abnormal coverage is not clear. In this article, we examine the implications of providing excessive protection to the directors and officers on managerial behavior and firm performance. We use firm reporting and investment activity to examine managerial behavior and firm’s profitability to examine firm performance. For a sample of U.S. firms from 2004 to 2008, our results show that abnormal D&O insurance is positively associated with aggressive reporting, aggressive investment activity, and abnormal profit performance. Our results hold even after controlling for endogeneity and serial correlation in the data.
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