Determinants of Market Reactions to the Disclosure of Directors and Officers Insurance Purchases - Evidence from Taiwan

This paper examines the market reaction to a sample of 623 directors’ and officers’ insurance first purchase announced from 2002- 2010 in Taiwan. This paper documents an average abnormal return of about -0.870 percent over a 2-day announcement window. Instead viewing such insurance necessary to attract and maintain competent directors and officers, shareholders view such insurance to have adverse effects on their wealth. In addition, this paper finds that more negative returns are associated with firms with more directors’ compensations (option), firms whose stocks are more volatile, and firms with higher litigation risks. The result of this paper support shareholder protection hypothesis, compensation package hypothesis, signalling hypothesis, and litigation risk hypothesis. The contribution of this paper is to indicate that disclosure of the purchase of D&O insurance, in addition to the characteristics of the firm’s corporate governance, are critical in determining the market reaction to D&O insurance purchase by firms. It indicates that detailed information in the D&O insurance purchase disclosure affect investors’ evaluation future company prospects as well as the risk/uncertainty of achieving them. Results of this paper also provide the evidence that mandatory disclosure of the details of D&O insurance purchase policy, as is required in countries like UK and Canada, is justified and valuable.

Keywords: Directors and officers insurance; Shareholder litigation; Board compensation; Corporate governance; Event study