INSURING THE AGENTS - THE ROLE OF DIRECTORS AND OFFICERS INSURANCE INCORPORATE GOVERNANCE

Holderness (1990) suggests that directors: and officers' (D&O) insuran ce has an important governance role in publicly owned companies. This article empirically tests Holderness's monitoring hypothesis by examin ing the association between board composition, managerial ownership, e xternal shareholder control, and the purchase of D&O insurance for a s ample of 366 companies in the United Kingdom. The results generally su pport the monitoring hypothesis. In large companies, where monitoring through external ownership is costly, D&O insurance and outside direct ors are utilized to monitor managers. In smaller companies, monitoring is more likely to be undertaken through internal and external ownersh ip with less reliance on D&O insurance.