What drives corporate insurance demand?: Evidence from directors’ and officers’ liability insurance in Korea (working paper)

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 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.