Dynamic panel models with Directors' and Officers' liability insurance data

This paper uses a unique US dataset to analyze the demand for Directors' and Officers' liability insurance utilizing dynamic panel models. Some well-established theories propose that corporate insurance plays a role in mitigating agency problems within the corporation such as those between shareholders and managers, and managers and creditors, mitigates bankruptcy risk as well as provides real-services efficiencies. Applying dynamic panel data models, this paper uses these theories to perform empirical tests. The hypothesis that D&O insurance is entirely habit driven is rejected, while some role for persistence is still confirmed. I confirm the real-services efficiencies hypothesis and the role of insurance in mitigating bankruptcy risk. Firms with higher returns appear to demand less insurance. Although alternative monitoring mechanisms over management do not appear to play a large role, I find some support that insurance and governance are complements rather than substitutes. I fail to confirm the role of insurance in mitigating under-investment problems in growth companies.