The effect of directors' and officers' liability insurance and indemnification on voluntary disclosure: Evidence from Canadian firms

This paper examines whether legal liability coverage, as measured by the level of Directors' and Officers' (D&O) liability insurance coverage and cash for indemnification, is associated with the quantity and quality of the firm's voluntary disclosures. Using Canadian firms whose D&O insurance data are publicly available, I find that the higher the coverage, the more frequent the voluntary disclosures, especially for firms that are cross-listed in the U.S. I also find that more liability coverage also leads to disclosures of more precise, but less timely, bad news for firms that are cross-listed in the U.S., consistent with the litigation cost argument for the disclosure of bad news. Further, cash for indemnification is a more significant determinant of disclosure decisions than D&O insurance for my sample firms. Finally, I provide new empirical evidence that the timing decision of actual earnings announcements is a function of a firm's legal liability coverage and the presence of voluntary disclosures in the form of management earnings forecasts.