The Quest for Talented Independent Directors: The Role of Directors' and Officers' Liability Insurance

This study explores whether directors' and officers' liability insurance (D&O insurance) is an effective tool in firms' quest for talented independent directors, that is, those who are highly educated, well-connected, or financial experts. We find that firms with D&O insurance are better able to recruit talented independent directors, supporting that the protection provided by D&O insurance is determinative when talented individuals are deciding whether to join a board. We also show that D&O insurance reduces the incidence of independent directors' resignation. Collectively, our evidence suggests that D&O insurance helps firms maintain a board with superior competence and greater stability, which also explains the wide prevalence of D&O insurance in practice.