Directors' and officers' liability insurance and acquisition outcomes |
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Authors: | Chen Lin Micah S Officer Hong Zou |
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Institution: | aChinese University of Hong Kong, Shatin, N.T., Hong Kong;bLoyola Marymount University, Los Angeles, CA 90045, USA;cCity University of Hong Kong, Kowloon Tong, Hong Kong |
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Abstract: | We examine the effect of directors' and officers' liability insurance (D&O insurance) on the outcomes of merger and acquisition (M&A) decisions. We find that acquirers whose executives have a higher level of D&O insurance coverage experience significantly lower announcement-period abnormal stock returns. Further analyses suggest that acquirers with a higher level of D&O insurance protection tend to pay higher acquisition premiums and their acquisitions appear to exhibit lower synergies. The evidence provides support for the notion that the provision of D&O insurance can induce unintended moral hazard by shielding directors and officers from the discipline of shareholder litigation. |
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Keywords: | JEL classification: G14 G22 G34 |
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