1D&O Insurance, Excess Director Compensation and Firm Value: Evidence from Taiwan

Our study examines the association between D&O insurance and excess director compensation using a sample of Taiwanese listed firms covering the years 2008 to 2012. Two competing arguments exist concerning the role of D&O insurance. One view suggests that D&O insurance could play a monitoring role to be beneficial to shareholders (O’Sullivan 1997; Holderness 1990). Another view suggests that D&O insurance decreases managers and directors ’ litigation risk and manager and directors would make self-dealing decisions to hurt shareholders (Core 1997, 2000; Chalmers et al. 2002). Understanding the costs and benefits of D&O insurance, we expect to investigate the net benefit of D&O insurance on excess director compensation. We examine the association between D&O insurance and director compensation. In addition, we also examine the association between D&O insurance and excess director compensation. The significantly negative relationship provides that the purchase of D&O insurance would decrease excess director compensation. We also test how firm characteristic variables, governance variables, board activity and director characteristic affects the relation between D&O insurance and excess director compensation. The association is positively related when the director s are experienced. When th