Overinvestment, ownership structure, and directors' and officers’ liability insurance

Chiang, Yao‐Min; Chang, Pang-Ru

doi:10.1016/j.iref.2021.11.002

Cited by 10 publications

(3 citation statements)

References 46 publications

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“…GROWTH and RETURN are included to capture growth opportunities, while the remaining variables ( LEV , CASH , AGE and SIZE ) are included to account for financial constraints, which have been found to be associated with new investment decisions (Hubbard, 1998b; Lamont, 2000; Richardson, 2006). YEAR and INDUSTRY are also included to control for business cycle effects and industry-specific effects (Chiang and Chang, 2022). The residual value obtained from Model (1) reflects the deviation between expected and actual new investment expenditure.…”

Section: Methodsmentioning

confidence: 99%

“…Furthermore, D&O insurance has been found to weaken the sensitivity of directors' compensation to firm performance (Wang and Chen, 2016). As a potential consequence, D&Os may engage in aggressive and irrational behaviors, such as over-hiring activities (Wang et al , 2022), over-investing activities (Chiang and Chang, 2022; Li and Liao, 2014) and paying higher M&A premiums (Lin et al , 2011). Capital market participants perceive the coverage of D&O insurance as an additional risk factor.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

“…In common-law jurisdictions, the purchase of D&O insurance is a common practice among listed firms (Zou et al , 2008). For instance, D&O insurance coverage is present in 97% of US firms, 86% in Canada, 60%–70% in Hong Kong SAR, China (Yuan et al , 2016) and approximately 55% in Taiwan, China (Chiang and Chang, 2022; Li and Liao, 2014). However, by the end of 2019, only 9% of firms in Mainland China had obtained D&O insurance coverage (Jiang et al , 2022).…”

Section: Introductionmentioning

confidence: 99%

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The impact of directors’ and officers’ liability insurance on firm’s investment efficiency: evidence from China

Li¹,

Sun

et al. 2023

PAR

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Purpose The purpose of this paper is to examine the impact of directors’ and officers’ liability insurance (D&O insurance hereafter) on corporate governance and firm performance, with a specific focus on investment efficiency. Design/methodology/approach Using a sample of Chinese A-share listed firms from the period 2007 to 2020, this study uses Ordinary Least Squares regressions to investigate the research questions, as well as moderating and mediating effects. Additionally, alternative measures of investment efficiency are used, and the Heckman two-stage model and propensity score matching model are used to demonstrate the consistency of the findings and to mitigate the risk of endogeneity. Findings The findings of this study suggest that purchasing D&O insurance has a detrimental impact on corporate investment efficiency, particularly in the context of over-investment activities; robust internal governance mechanisms, exemplified by a higher shareholding ratio of the top shareholder and enhanced internal control quality, alleviate this negative effect; and financing constraints act as a mediating factor in the association between D&O insurance and investment efficiency. Originality/value Corporate investment efficiency is of significant importance for both national macroeconomic growth and micro-enterprise development. Notably, the prevalence of D&O insurance among Chinese firms is progressively increasing, thus exerting a growing influence. This study contributes to the existing literature on D&O insurance and corporate investment efficiency, providing valuable insights into the economic impact of D&O insurance on Chinese firms. The empirical evidence presented herein facilitates future reforms and adjustments.

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