We examine whether directors' and officers' (D&O) liability insurance affects a firm's cost of equity. We find a positive association between D&O insurance and the cost of equity. Information quality and risk-taking appear to be two underlying channels through which D&O insurance affects the cost of equity. Further tests suggest that this positive association is not due to optimal risk-taking, as evidenced by a negative market reaction to an increase in D&O insurance coverage, a lack of improvement in firms' cash flow and a low valuation associated with D&O insurance. Overall, our evidence is consistent with the notion that D&O insurance weakens the disciplining effect of shareholder litigation, leading to an increase in the cost of equity.We thank S.P. Kothari (the editor) and an anonymous reviewer for many insightful comments and suggestions. We also thank

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The distributions of Real Estate Investment Trusts (REITs) are comprised of components that differ in how they are taxed to the recipient shareholders. This variation in tax characteristics enables us to study the effect of shareholder taxes on stock prices around ex-dividend days, while avoiding the problems associated with non-tax confounding factors and intertemporal tests that have hampered the interpretation of previous studies. Using a dataset that includes the component makeup of individual REIT distributions, we provide evidence that abnormal returns and trading volume around ex-dividend days are driven by the component of the distributions that is most tax-penalized. Our results support a tax-based explanation for ex-dividend day pricing and investor trading behavior.

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