The Effect of Liability Exposure on the Actions of Directors and Officers of Major U.S. Firms

This paper presents the results from 149 responses to an August 1992 mail questionnaire survey of CEOs of the Business Week 1000 firms to examine their perception of liability exposure and reaction to it within the agency framework. The results suggest that liability exposure has resulted in a variety of actions to reduce exposure to potential liability from lawsuits. The actions should result in better monitoring by directors and officers with no significant increase in monitoring costs but instead, a significant decrease in the residual loss. The net effect should be a decrease in agency costs, consistent with maximization of shareholder wealth.