Directors’ and officers’ liability insurance and accounting conservatism: empirical evidence from China

Abstract

PurposeThis study analyses Chinese data to revisit the relationship between directors’ and officers’ (D&O) insurance and accounting conservatism, aiming to investigate the impact of investors’ legal protection on the function of D&O insurance.Design/methodology/approachThe study sample included all A-share firms listed on the Shanghai and Shenzhen Stock Exchanges from 2006 to 2019. Multiple regression was used to investigate the association between D&O insurance and accounting conservatism. The Heckman two-stage model and the propensity score matching method were used to check the robustness of the main results.FindingsD&O insured companies exhibited greater accounting conservatism. The higher the indemnity limit, the more conservative a firm’s earnings reporting. The positive correlation was stronger when investor protection was relatively weak. The impact of D&O insurance on accounting conservatism was stronger for companies with weaker internal or external supervision mechanisms.Originality/valueThe study findings show that D&O insurance plays a positive role in the governance of listed companies when investors’ legal protection is weak, which supports the effective supervision hypothesis of D&O insurance.