U.S. Evidence from D&O Insurance on Accounting-Related Agency Costs: Implications for Country-Specific Studies

Abstract

ABSTRACT Many studies use country-specific evidence to investigate research questions of broad interest due to data availability or to exploit an exogenous event that allows identification. One such research stream largely examines Canadian directors' and officers' (D&O) insurance and finds that more coverage (i.e., higher limits) is negatively associated with financial reporting quality and positively related to litigation (accounting-related agency costs). However, the U.S. and Canada differ on key issues relevant to securities litigation and D&O insurance. Thus, we predict and find that premiums, rather than limits, provide information about U.S. accounting-related agency costs. Nonetheless, the incremental information provided by premiums about accounting-related agency costs is limited, and audit fees provide better information about these agency costs. Thus, although researchers argue for disclosure of U.S. D&O insurance information, the usefulness of such disclosures may be limited because audit fees are already disclosed. Our findings suggest caution in broadly generalizing country-specific studies.