The effect of D&O insurance on managerial risk taking

Excessive risk taking of managers is associated with corporate failure. Researchers argue that insurance against personal liability of a manager (Directors and Officers liability insurance) would weaken his incentive to take care and partly causes excessive risk taking. Because only little is actually known about D&O insurance, this thesis analyses how D&O insurance should work ideally and how it currently works. This thesis observes that: (i) The value of investment decisions seems to rise with D&O coverage when competitive pressure is high enough; (ii) the insured manager benefits banks, provided that the corporation purchases an average insurance coverage; (iii) the D&O insurer settles disputes differently than courts, taking into account the degree of bad publicity in the media; and (iv) in times of financial instability, D&O insurance is the best analysed compensation measure in safeguarding firm performance. Hence, smaller corporations that do not carry D&O insurance yet would greatly benefit from it.