Directors’ and Officers’ Liability Insurance and Corporate Innovation

Abstract

We examine whether directors’ and officers’ (D&O) liability insurance affects corporate innovation. We find a positive association between D&O insurance and innovation. The result is robust to a series of robustness checks, including Heckman model, longer test windows of corporate innovation and a difference-in-differences analysis based on a propensity-score-matched sample. Our further analyses show that the impact of D&O insurance on innovation becomes more pronounced for firms with lower risk tolerance, higher litigation risk, and a stronger willingness to innovate. Finally, we find that risk-taking appears to be the underlying channel through which D&O insurance affects innovation.