BeschreibungWe provide a model of job-market screening in which shareholders (employers) are uncertain about the managerial skills of their directors (employees). The employment contract specifies the director's salary, which can be based on firm performance, and the director's personal liability towards shareholders. After observing firm performance, shareholders can initiate legal proceedings against individual directors where courts provide a costly and imperfect signal.
Shareholders can limit the personal liability of individual directors either through adopting liability and indemnity (LLI) provisions, which limit the director's personal liability towards shareholders, or through purchasing directors' and officers' insurance (D&O insurance), which guarantees protection in case of a lawsuit.
We find that both LLI provisions and D&O insurance are part of the optimal managerial compensation package. We show that D&O insurance coverage and remuneration are complements, and that LLI provisions are negatively and D&O insurance coverage is positively related to the directors' skill. Those findings are consistent with the empirical literature.
|Zeitraum||7 Aug. 2011 → 10 Aug. 2011|
|Ereignistitel||American Risk and Insurance Association Meeting|