BeschreibungThis paper presents a job-market screening model in which risk-neutral shareholders hire risk-averse directors and officers (D&Os) that take over the tasks of monitoring and operating the corporation. The auditing and management skills of the D&Os are, however, unobservable to shareholders. The employment contract specifies incentive payments and the personal liability of D&Os' towards shareholders. After observing firm performance, shareholders can initiate legal proceedings against D&Os where courts provide a costly and imperfect signal on the D&Os' skill.
Abstract Our model explains (i) why D&O insurance is purchased by the corporation itself rather than by its D&Os, (ii) why directors' and officers' insurance (D&O insurance) coverage and salary are complements, and (iii) why the personal liability of D&Os is negatively and D&O insurance coverage is positively correlated to the management skills of D&Os. These results are consistent with the empirical literature.
|17 Sept. 2012 → 19 Sept. 2012
|Seminar of the European Group of Risk and Insurance Economists