The Cost of Disclosure Regulation: Evidence from D&O Insurance and Non-Meritorious Securities Litigation

There is an extensive literature on the benefits of mandatory disclosure by firms, but measuring the costs of such disclosure has been more challenging (Leuz and Wysocki 2016). In particular, while some believe that mandatory disclosure could increase litigation against firms (e.g. Coates and Srinivasan 2014), few papers find such evidence. We use proprietary directors’ and officers’ (D&O) insurance data and a natural experiment based on inter-state variation in disclosure regulation to examine this question. Specifically, state law requires that firms incorporated in New York disclose D&O insurance premiums. We examine whether D&O insurance premiums for New York and non-New York firms are associated with securities litigation.

Disclosed premiums may influence case selection in two ways. First, higher premiums signal higher limits, which plaintiffs’ lawyers likely believe enable higher settlements. Second, higher premiums indicate higher risk assessments from insurers, and thus a higher likelihood that stock price drops signal misconduct rather than bad luck. Thus, New York firms with high D&O insurance premiums are likely to attract plaintiffs’ lawyers. Such  information may be particularly appealing to plaintiffs’ lawyers whose fees are contingent on their clients’ recovering some amount of money and who must bear all the costs for the 40 percent of securities cases that are dismissed.

We use a large sample of U.S. firms from 1998-2010 and focus on securities class actions, because they are the costliest form of shareholder litigation, and case selection is viewed as particularly opportunistic (Coffee 2006). We find that D&O insurance premiums for New York firms are associated with higher incidences of future litigation, and this relation is driven entirely by non-meritorious (dismissed) cases. However, offsetting this higher dismissal rate, plaintiffs’ lawyers are able to extract higher settlements in the relatively few successful cases against New York firms that survive a motion to dismiss. We also find that these results are concentrated among firms with the highest litigation risk and costs and are robust over time. Economically, our results imply that nationwide disclosure of D&O insurance premiums would have resulted in a significant increase in non-meritorious cases over our sample period equivalent to approximately 12 percent to 19 percent of the total securities class actions in the period.

Thus, while the academic literature on litigation risk and disclosure has focused on how firms attempt to lower litigation risk through voluntary disclosure (e.g., Skinner 1997; Field et al. 2005), we find that mandatory disclosure can increase litigation. This evidence is particularly timely based on recent calls for the nationwide disclosure of D&O insurance information by academics (e.g., Griffith 2006) and accounting standard setters (Financial Accounting Standards Board [FASB] 2008, 2010). Thus, while investors continue to criticize existing disclosures about litigation risks and exposure as insufficient (CFA Institute 2013), our findings validate the concerns raised by corporations and lawyers in the comment process to the FASB about the potential adverse consequences of improved disclosure, namely that it would trigger litigation. These concerns ultimately led the FASB to abandon the project (Frankel 2012). Finally, an additional unintended consequence of such mandatory disclosure is that  the selection by plaintiffs’ lawyers of non-meritorious cases rather than meritorious cases that appear less profitable may undermine the deterrent effect of litigation on corporate malfeasance (see Pritchard 2002).


CFA Institute. (2013). Financial reporting disclosures: Investor perspectives on transparency, trust, and volume. July. Available at:

Coates IV, J. C., & Srinivasan, S. (2014). SOX after ten years: A multidisciplinary review. Accounting Horizons, 28(3), 627–671.

Coffee, J. C. (2006). Reforming the securities class action: An essay on deterrence and its implementation. Columbia Law Review, 106(7), 1534–1586.

Field, L., Lowry, M., & Shu, S. (2005). Does disclosure deter or trigger litigation? Journal of Accounting and Economics, 39(3), 487–507.

Financial Accounting Standards Board (FASB). (2008). Disclosure of Certain Loss Contingencies: an amendment of FASB Statements No. 5 and 141(R). Proposed Statement of Financial Accounting Standards. Norwalk, CT.

Financial Accounting Standards Board (FASB). (2010). Contingencies (Topic 450): Disclosure of Certain Loss Contingencies. Proposed Accounting Standards Update. Norwalk, CT.

Frankel, A. (2012). Accounting board drops call for beefed–up litigation risk disclosure. Reuters. July 11. Available at:–frankel/2012/07/11/accounting–board–drops–call–for–beefed–up–litigation–risk–disclosure/

Griffith, S. J. (2006). Uncovering a gatekeeper: Why the SEC should mandate disclosure of details concerning directors’ and officers’ liability insurance policies. University of Pennsylvania Law Review, 154(5), 1147–1208.

Leuz, C., & Wysocki, P. D. (2016). The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research. Journal of Accounting Research, 54(2), 525–622.

Pritchard, A.C. (2002). Who Cares? Washington University Law Quarterly, 80, 883–888.

Skinner, D. J. (1997). Earnings disclosures and stockholder lawsuits. Journal of Accounting and Economics, 23(3), 249-282.

This post comes to us from Professor Dain C. Donelson at the University of Texas at Austin’s McCombs School of Business, Professor Justin J. Hopkins at the University of Virginia’s Darden Graduate School of Business Administration, and Professor Christopher G. Yust at Texas A&M University. It is based on their recent article, “The Cost of Disclosure Regulation: Evidence from D&O Insurance and Non-meritorious Securities Litigation,” which is forthcoming in the Review of Accounting Studies and available here

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