The Directors' and Officers' Insurance Premium: An Outside Assessment of the Quality of Corporate Governance

Using a sample of directors' and officers' (D & O) premiums gathered from the proxy statements of Canadian companies, this article examines the D & O premium as a measure of ex ante litigation risk. I find a significant association between D & O premiums and variables that proxy for the quality of firms' governance structures. The association between the proxies for governance structure quality and D & O premiums is robust to a number of alternative specifications. This article provides confirmatory evidence that the D & O premium reflects the quality of the firm's corporate governance by showing that measures of weak governance implied by the D & O premium are positively related to excess CEO compensation. The overall results suggest that D & O premiums contain useful information about the quality of firms' governance.