Abstract
Abstract This paper investigates the effect of directors and officers liability insurance (D&O insurance) on firm investment behaviour. Under the Chinese institutional environment, we analyse the relationship between D&O insurance and firms’ capital expenditure decisions. We find that compared with firms without D&O insurance, firms with D&O insurance will invest more with free cash flow and that their investment efficiency decreases. We get the same findings when we compare the investment behaviour of the same company between a period with D&O insurance and a period without D&O insurance. Our findings imply that improving the effect of D&O insurance on corporate governance should rely on the development of minority shareholder protection under the existing institutional environment.
Highlights
This paper investigates the effect of directors and officers liability insurance (D&O insurance) on firm investment behaviour under the Chinese institutional environment
According to the definition of the Chartered Insurance Institute (CII), D&O insurance is a special type of insurance, which can provide financial protection for directors and officers when they face lawsuits or financial liability
Since D&O insurance is a special type of insurance, it can provide financial protection for companies and managers when facing lawsuits or financial liability
Summary
This paper investigates the effect of directors and officers liability insurance (D&O insurance) on firm investment behaviour under the Chinese institutional environment. According to the definition of the Chartered Insurance Institute (CII), D&O insurance is a special type of insurance, which can provide financial protection for directors and officers when they face lawsuits or financial liability. In China, despite encouragement from the government and exchanges, most companies show no interest in buying it. D&O insurance is considered to be the “best game that no one played” in China (Wang, 2009), and there is controversy about its influence on corporate governance and firm value among researchers. O’Sullivan (1997) showed that D&O insurance could be an effective mechanism for enhancing corporate governance and found that companies with a more independent board would purchase more D&O insurance. D&O insurance offers the “last chance” for protecting investors from directors’ wrong decisions
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