Managerial Liability Coverage, Controlling Shareholders, and Ownership Structure

This study investigates whether controlling shareholders with managerial entrenchment, as measured by greater deviation in cash flow and control rights, are associated with managerial liability coverage. Using a sample of director and officer (D&O) liability insurance data, we find that firms with more serious agency conflicts between controlling and outside shareholders are more likely to purchase D&O liability insurance. We also find that controlling shareholders who face greater litigation risk have an incentive to carry abnormally high D&O liability insurance coverage. Our results indicate that an incentive exists to acquire managerial liability coverage against litigation risks arising from incentive conflicts between controlling and outside shareholders.