What drives corporate insurance demand?: Evidence from directors’ and officers’ liability insurance in Korea (working paper)
Park, MK
Date: 28 February 2018
Publisher
University of Exeter Business School
Abstract
This paper provides empirical evidence that increasing risk results in higher demand for
hedging among firms. In a natural experiment exploring the Korean Government’s legislative
change on shareholder class action, I show that firms increase their directors’ and officers’
liability insurance coverage in response to increased ...
This paper provides empirical evidence that increasing risk results in higher demand for
hedging among firms. In a natural experiment exploring the Korean Government’s legislative
change on shareholder class action, I show that firms increase their directors’ and officers’
liability insurance coverage in response to increased litigation risk despite increasing price
of buying further coverage. I further test the heterogeneous effects in two dimensions of
corporations: industry classification, and type of shareholder-management relation. The
results confirm that firms in high litigation risk industries and those having high agency
conflicts between shareholders and management increase their insurance coverage relatively
more. Overall, the results demonstrate that corporations adjust their hedging demand in
response to changing risk environment and that the adjustment depends on the level of risk
exposure of individual firms.
Finance and Accounting
Faculty of Environment, Science and Economy
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