The cost of disclosure regulation: evidence from D&O insurance and nonmeritorious securities litigation

Dain Donelson (), Justin J. Hopkins () and Christopher G. Yust ()
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Justin J. Hopkins: Darden Graduate School of Business, University of Virginia
Christopher G. Yust: Texas A&M University

Review of Accounting Studies, 2018, vol. 23, issue 2, No 5, 528-588

Abstract: Abstract This study examines whether the required disclosure of directors’ and officers’ (D&O) insurance premiums leads to nonmeritorious securities litigation. Our research setting uses a proprietary D&O insurance database that includes New York and non-New York firms, combined with the fact that New York firms must disclose D&O insurance premiums. We thus can exploit a natural experiment based on inter-state variation in disclosure regulation. Disclosed premiums may influence case selection in two ways. First, higher premiums signal higher limits, which plaintiffs’ lawyers likely believe enable higher settlements. Second, higher premiums indicate higher risk assessments from insurers and thus a higher likelihood that stock price drops signal misconduct rather than bad luck. We find that D&O insurance premiums for New York firms are associated with a higher dismissal rate. Offsetting this higher dismissal rate, plaintiffs’ lawyers can achieve higher settlements in the relatively few successful cases.

Keywords: Disclosure Regulation; Directors’ and Officers’ (D&O) Insurance; Litigation (search for similar items in EconPapers)
JEL-codes: G38 K22 K41 M41 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s11142-018-9438-2

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