Is corporate governance risk valued? Evidence from directors' and officers' insurance

We find that common equity firms pay lower D&O insurance premiums than income trusts, an alternative and riskier ownership form. This result has wide-ranging implications for investors insofar as the information provided by D&O insurers provides investors with an unbiased signal of the firm's governance risk. The signal is unbiased because it comes from an entity (i.e. the insurer) that has a direct financial incentive to correctly assess an organization's governance risk, in contrast to other ad hoc governance measures and indices.

► Common equity firms pay lower D&O insurance premiums than income trusts, an alternative and riskier ownership form. ► The insurer has a financial incentive to correctly assess governance risk, in contrast to ad hoc governance measures. ► The information provided by D&O insurers provides investors with an unbiased signal of the firm's governance risk.