Quotation Kremslehner, Robert. 2012. Limited Liability Provisions and Directors' and Officers' Insurance. Seminar of the European Group of Risk and Insurance Economists, Palma de Mallorca, Spanien, 17.09.-19.09..


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Abstract

This paper presents a job-market screening model in which risk-neutral shareholders hire risk-averse directors and officers (D&Os) that take over the tasks of monitoring and operating the corporation. The auditing and management skills of the D&Os are, however, unobservable to shareholders. The employment contract specifies incentive payments and the personal liability of D&Os' towards shareholders. After observing firm performance, shareholders can initiate legal proceedings against D&Os where courts provide a costly and imperfect signal on the D&Os' skill. Abstract Our model explains (i) why D&O insurance is purchased by the corporation itself rather than by its D&Os, (ii) why directors' and officers' insurance (D&O insurance) coverage and salary are complements, and (iii) why the personal liability of D&Os is negatively and D&O insurance coverage is positively correlated to the management skills of D&Os. These results are consistent with the empirical literature.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Paper presented at an academic conference or symposium
Language English
Title Limited Liability Provisions and Directors' and Officers' Insurance
Event Seminar of the European Group of Risk and Insurance Economists
Year 2012
Date 17.09.-19.09.
Country Spain
Location Palma de Mallorca

Associations

People
Kremslehner, Robert (Former researcher)
Organization
Institute for Finance, Banking and Insurance IN (Details)
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