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School of Business | Department of Finance | Finance | 2015
Thesis number: 14067
Directors' and officers' liability insurance and acquirer returns
Author: Lehtonen, Petri
Title: Directors' and officers' liability insurance and acquirer returns
Year: 2015  Language: eng
Department: Department of Finance
Academic subject: Finance
Index terms: rahoitus; financing; yrityskaupat; corporate acquisitions; vakuutukset; insurances; vastuu; responsibility; osakkeet; shares; tuotto; rate of return
Pages: 70
Full text:
» hse_ethesis_14067.pdf pdf  size:2 MB (1150360)
Key terms: acquisition, D&O insurance, insurance coverage, insurance premium, corporate governance index, cumulative abnormal announcement return, cross-listing

In this thesis, I study the impact of directors' & officers' liability insurance (D&O insurance) on acquirer abnormal announcement returns. My first objective is to replicate results in the prior literature of the relation between D&O insurance coverage and acquirer returns using firms listed only in Canada. I then study the possible effect of cross-listing in the US to the results. The second objective of my research is to study whether D&O insurance premium can be used as a proxy for corporate governance quality and to compare its explanatory power of acquirer returns to two corporate governance indexes, The Globe and Mail Governance Index and Board Shareholder Confidence Index.


My sample consists of 2,238 completed acquisitions between 2003 and 2013. Firms listed only in Canada made 1,602 of these acquisitions and firms cross-listed in the US made 636 of them. D&O insurance and corporate governance indexes data are unique as they are hand-collected. My analysis is based on univariate and multivariate regression models (ordinary least regression, OLS). In the regressions I use 5-day cumulative abnormal announcement return as dependent variable, and D&O insurance variables and two corporate governance indexes as explanatory variables. I control for deal and acquirer characteristics, deal types, and year and industry fixed-effects.


First, I find significant negative relation between D&O insurance coverage and cumulative acquirer announcement returns with sample firms listed only in Canada. The negative relation is in line with the prior literature. However, acquirer returns become positive when a firm is cross-listed in the US, indicating that higher D&O insurance protection can be beneficial for shareholders of firms operating in the US market. Thus, my results suggest that the effect of D&O insurance variables on acquirer returns varies in different markets. Second, I find significant negative relation between D&O insurance premium and acquirer returns, indicating that insurance companies can price the risk related to corporate governance structures. Furthermore, I do not find significant relation between the two corporate governance indexes and acquirer returns, which supports the idea that D&O insurance premium includes valuable information not otherwise available in the market.
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