NDLI: Accounting and litigation risk: evidence from Directors’ and Officers’ insurance pricing

Content Provider	Springer Nature Link
Author	Cao, Zhiyan Narayanamoorthy, Ganapathi S.
Copyright Year	2013
Abstract	We study whether and how financial reporting concerns are priced by insurers that sell Directors’ and Officers’ (D&O) insurance to public firms. As D&O insurers typically assume the liabilities arising from shareholder litigation, the premiums they charge for D&O coverage reflect their assessment of a company’s litigation risk. Using a sample of public firms in the 2001–2004 Tillinghast D&O insurance surveys, we document that firms with lower earnings quality or prior accounting restatements pay higher premiums after controlling for other factors impacting litigation risk. In addition, insurers’ concerns about financial reporting are most evident for firms with restatements that are not revenue or expense related, are greater in the period following the passage of the Sarbanes–Oxley Act of 2002, and are greater for firms with financial reporting problems that linger. Our results are consistent with past restatements being viewed as evidence of chronic problems with a firm’s financial statements. By analyzing archival data, we can also quantify the effects of other determinants of D&O premiums (such as business risk, corporate governance, etc.) identified by Baker and Griffith (Univ Chic Law Rev 74(2):487–544, 2007a) through interviews regarding the D&O underwriting process.
Starting Page	1
Ending Page	42
Page Count	42
File Format	PDF
ISSN	13806653
Journal	Review of Accounting Studies
Volume Number	19
Issue Number	1
e-ISSN	15737136
Language	English
Publisher	Springer US
Publisher Date	2013-08-28
Publisher Place	Boston
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Financial reporting quality Accounting restatements Directors’ and Officers’ insurance Litigation risk D&O Corporate governance Accounting/Auditing Finance/Investment/Banking Public Finance & Economics
Content Type	Text
Resource Type	Article
Subject	Accounting

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