Legal Liability Coverage and Voluntary Disclosure

Abstract

ABSTRACT: This paper examines whether legal liability coverage, as measured by excess Directors’ and Officers’ (D&O) liability insurance coverage and excess cash for indemnification, is associated with the quantity and the quality of a firm’s voluntary disclosures. Using Canadian firms whose D&O insurance data are publicly available, I find that firms with higher excess coverage are less likely to report bad news forecasts for the sample firms that are cross-listed in the U.S., and that the number of bad news forecasts decreases for large cross-listed sample firms having high litigation risk. The results are consistent with the litigation cost argument for the disclosure of bad news. I also find that higher excess liability coverage leads to disclosures of more precise bad news for the cross-listed sample firms and less timely disclosures of bad news for large cross-listed sample firms. Further, excess cash for indemnification is a more significant determinant of disclosure decisions.