Directors’ and officers’ liability insurance and corporate digital transformation

Abstract

ABSTRACT In the digital era, digital transformation has become imperative for enterprises to seek better development opportunities. Using a sample of Chinese A-share listed firms from 2007 to 2020, we document a positive relationship between directors’ and officers’ liability insurance (D&O insurance) and corporate digital transformation. This correlation is robust to a series of robustness tests. Further mechanism tests reveal that mitigating agency costs and enhancing risk-taking ability are two potential channels. Additional heterogeneity analyses show that the impact of D&O insurance on digital transformation is more pronounced for non-state-owned firms, firms perceiving more economic policy uncertainty, firms with less media coverage and firms in highly competitive industries. These findings suggest that companies should pay attention to the positive governance effect of D&O insurance and it’s more advisable for companies with severe agency conflict and weak risk-taking ability to purchase D&O insurance to facilitate digital transformation.