Directors’ liability insurance and investment-cash flow sensitivity

Chan, Chia-Chung; Chang, Yung‐Ho; Chen, Chia-Wei; Wang, Yuwei

doi:10.1007/s12197-017-9425-7

Cited by 7 publications

(4 citation statements)

References 47 publications

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“…Collectively, these studies demonstrate a profound impact of D&O insurance on firms' financial reporting quality, tax reporting, auditing, cost of equity, firm value and so on (e.g. Lin, Officer, Wang & Zou, 2013;Boyer & Tennyson, 2015;Chan, Chang, Chen & Wang, 2019;Li & Liao, 2014;Wang, Zhang, Huang & Zhang, 2020).…”

Section: Introductionmentioning

confidence: 99%

Why do firms purchase directors' and officers' liability insurance? – perspective from economic policy uncertainty

Jiang

Jia

2022

CAFR

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PurposeThis study aims to investigate whether firms purchase directors' and officers' liability (D&O) insurance when the country-level economic policy uncertainty (EPU) is high.Design/methodology/approachThis study uses D&O insurance data from Chinese listed firms between 2003 and 2019 to conduct regression analyses to examine the association between D&O insurance and EPU.FindingsThe results show that government EPU, despite being an exogenous factor, increases the likelihood of firms' purchasing D&O insurance, and this effect is more pronounced when firms are exposed to great share price crash risk and high litigation risk, suggesting that firms intend to purchase D&O insurance possibly due to the accentuated stock price crash risk and litigation risk associated with EPU. In addition, the results indicate that the effect of EPU on the D&O insurance purchase decision is moderated by the provincial capital market development and internal control quality.Practical implicationsThe study highlights the role of uncertain economic policies in shareholder approval of D&O insurance purchases.Originality/valueThe study enriches the literature on the determinants of D&O insurance purchases by documenting novel evidence that country-level EPU is a key institutional factor shaping firms' decisions to purchase D&O insurance.

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Section: Introductionmentioning

confidence: 99%

Why do firms purchase directors' and officers' liability insurance? – perspective from economic policy uncertainty

Jiang

Jia

2022

CAFR

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“…Studies have provided evidence that D&O insurance leads to moral hazards from the perspectives of overinvestment, corporate mergers and acquisitions, and surplus management. For example, Chan et al (2019) showed that D&O could easily become an "umbrella" for the selfinterested behavior of executives because the risk-averse effect reduces the rent-seeking cost of executives, thereby increasing the eagerness of executives to economically over-invest. Based on a study of firms in Taiwan, Li and Liao, (2014) confirmed that D&O insurance coverage is positively associated with economic overinvestment, indicating that D&O insurance reduces corporate investment efficiency.…”

Section: Hypothesis Developmentmentioning

confidence: 99%

How does D&O insurance affect corporate environmental investment?

Liu

Jiang

Gan

2022

Front. Environ. Sci.

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Directors’ and officers’ liability insurance (D&O insurance), an important tool for diversifying and transferring risks of managers, plays a crucial role in corporate investment decisions, including corporate environmental investment decisions. However, the relationship between D&O insurance and corporate environmental investment remains unknown. Using a sample of Chinese listed firms, this study examines whether and how D&O insurance affects corporate environmental investment from 2008 to 2019. We find that D&O insurance is negatively associated with corporate environmental investment. This result is consistent with the results of a series of robustness tests. Further analyses show that D&O insurance impedes corporate environmental investment by driving executives to seek private benefits, especially monetary benefits. Moreover, the negative effect of D&O insurance on corporate environmental investment is more pronounced in low-polluting and highly competitive industries. However, this negative relationship is mitigated by political connections. The findings contribute to the literature by providing empirical evidence of the involvement of D&O insurance in influencing corporate environmental investment decisions.

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“…One group suggests that the purchase of D&O insurance, especially one with high coverage and premium, will likely lead a company's performance to deteriorate in certain ways, causing corporate idiosyncratic risk to increase. In a study of Taiwanese firms, it is shown that given the same level of cash flow, insured firms are more likely to have excessive investment than uninsured firms, which is the result of opportunistic managerial behaviors, fueled by moral hazard inherent in the insurance, as directors and officers are exempt from being personally litigated when investors' interest is infringed by corporate wrongdoing [10]. It has also been shown that the long-run stock price performance of US firms issuing IPOs is negatively related to the amount of D&O insurance they have purchased, mostly due to managerial opportunism [11].…”

Section: Hypotheses Developmentmentioning

confidence: 99%

“…Therefore, we believe that it is reasonable to correlate the purchase of D&O insurance with a surge in risktaking and opportunistic managerial behaviors. These behaviors can cause the likelihood of corporate wrongdoing [10], which will become the main cause of an increase in the corporate idiosyncratic risk.…”

Section: Hypotheses Developmentmentioning

confidence: 99%

Directors’ and Officers’ Liability Insurance and Corporate Idiosyncratic Risk

Huang¹,

Shi²,

Shi³

et al. 2021

Proceedings of the 2021 3rd International Conference on Economic Management and Cultural Industry (ICEMCI 2021)

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We examine the effect of directors' and officers' insurance (D&O insurance) on corporate idiosyncratic risk in the Chinese market. We find that D&O insurance in China is negatively associated with corporate idiosyncratic risk. This association is robust to a series of robustness checks, including propensity score matching procedure and the inclusion of some possibly omitted variables. Further analyses show that only the idiosyncratic risk of the state-owned enterprises (SOE) can be significantly affected by the purchase of D&O insurance. Moreover, we find that the impact of D&O insurance on idiosyncratic risk is more pronounced in firms with Big 4 auditors, higher analyst coverage, and higher growth rate. Our findings support the notion that D&O insurance appears to improve corporate governance and provide a new understanding of the effectiveness of D&O insurance in emerging economies.

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Directors’ liability insurance and investment-cash flow sensitivity

Cited by 7 publications

References 47 publications

Why do firms purchase directors' and officers' liability insurance? – perspective from economic policy uncertainty

Why do firms purchase directors' and officers' liability insurance? – perspective from economic policy uncertainty

How does D&O insurance affect corporate environmental investment?

Directors’ and Officers’ Liability Insurance and Corporate Idiosyncratic Risk

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