Managerial Opportunism in Accounting Choice: Evidence from Directors' and Officers' Liability Insurance Purchases
50 Pages Posted: 20 Mar 2008
Date Written: March 2008
Abstract
We examine the relation between the managerial opportunism embedded in earnings management, and D&O insurance. We investigate (a) whether managers are more willing to engage in opportunistic behavior by adopting an aggressive earnings management strategy when they are covered by a relatively higher D&O insurance limit; (b) whether managers purchase D&O insurance coverage in anticipation of opportunistic accounting choice; and (c) whether insurers can distinguish abnormally large insurance purchases driven by opportunism in accounting choice from those driven by abnormal risk aversion. Our evidence strongly supports the managerial opportunism hypothesis in managing earnings. In particular, we find that managers purchase insurance coverage in anticipation of opportunistic earnings management around equity issuing events. We also find that the best insured managers are those who manipulate the most the earnings. Interestingly, we find that the insurers are not myopic to the harms of opportunistic managerial behavior. They are able to detect and charge higher insurance premiums to managers with a hidden opportunistic agenda. Overall, these results suggest that the D&O insurance market enhances opportunistic managerial behavior. We do not find any support for the prediction that lower D&O insurance premiums are associated with good corporate governance quality.
Keywords: Directors, and Officers, liability insurance, managerial opportunism, seasoned equity offerings, earnings management
JEL Classification: G22, G32
Suggested Citation: Suggested Citation
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