Directors and officers liability insurance and default risk

Abstract

This paper investigates the effects of directors and officers (D&O) liability insurance on default risk. Using unique panel data of non-financial listed firms in Taiwan from 2010 to 2017, the empirical results indicate that D&O insurance exerts a significantly positive influence on firms' expected default frequency (EDF), controlling for the endogeneity of D&O insurance coverage and fixed effects. Further analyses reveal that such an effect exists particularly among firms with a high D&O insurance coverage ratio. Firms with D&O insurance have higher default risk than those without. Our findings differ from those in the existing literature by showing that D&O insurance coverage reflects firms' EDF and by capturing more insight on firms' EDF (market value, stock return volatility and firm asset volatility). The evidence indicates that D&O insurance may serve as a real-time, publicly observable signal of default risk for insurers and investors, enabling better contracting and risk management.

Directors’ and Officers’ Liability Insurance, Risk Taking, and Corporate Strategic Deviation

“…This indicates a clear positive correlation between the purchase of D&O liability insurance (Doins) and the level of corporate risk-taking (Risk), meaning that purchasing D&O liability insurance helps to enhance a company's ability to bear risk, confirming Hypothesis H2. This finding is consistent with the conclusions of studies by Boyer & Tennyson (2015), Kim (2016), Hwang & Kim (2018), Wang et al (2020), and others.…”

“…Priest (1987) considered D&O liability insurance a good incentive for attracting excellent senior management talent, promoting positive company development. D&O liability insurance primarily enhances a company's risk-taking capacity through the "incentive effect" (Boyer & Tennyson, 2015;Kim, 2016), with risk-taking behavior and company value increase being significant for companies with greater growth opportunities (Hwang & Kim, 2018). Wang et al (2020) also believe that the incentive role of D&O liability insurance increases the management and company's tolerance for risk, enhancing governance effects and providing a clear impetus for corporate innovation.…”

Corporate Social Responsibility and Directors’ and Officers’ Liability Risk: The Moderating Effect of Risk Environment and Growth Potential

“…In addition to the firm’s risk environment, opportunities for growth are also expected to moderate the CSR–risk relationship. Recent studies in the risk management and insurance field have shown that high-growth firms face greater litigation risk in general, and greater D&O litigation risk in particular ( Du et al, 2020 ; Huang, 2022 ; Hwang & Kim, 2018 ). When a firm faces a security class-action lawsuit, directors and officers could potentially suffer from both financial and reputational losses ( Brochet & Srinivasan, 2014 ; Fich & Shivdasani, 2007 ; McTier & Wald, 2011 ), especially when the lawsuits are combined with actions from the government or industry agencies ( Helland, 2006 ).…”