Directors and officers liability insurance placement, financial innovation, and the dynamic capabilities of listed companies

Managerial overconfidence and directors' and officers' liability insurance

In this paper, we investigate factors that explain the disclosure of Directors and officers liability (D&O) insurance. D&O insurance is used extensively in top management compensation. Surprisingly, only a handful of firms listed in the US disclose their D&O insurance practices (based on our extensive search of publicly available databases on corporate disclosure). Using a sample of firms from 2004 to 2008, we focus on level of competition, threat of increase in lawsuit, and internal governance to examine the determinants of the disclosure practices. Consistent with the hypothesis, the results show that firms in competitive industries, firms with a high threat of lawsuits, big firms, and firms with weak internal governance are less likely to disclose D&O insurance. We further find that variations in the scope and nature of disclosure are associated with the firms’ litigation risk and governance structure.

In recent times, there has been evidence of abnormal Directors and Officers liability (D&O) insurance purchase by the firms. Although D&O coverage is necessary to protect the directors and officers from the rising lawsuit risk, the motivation for carrying abnormal coverage is not clear. In this article, we examine the implications of providing excessive protection to the directors and officers on managerial behavior and firm performance. We use firm reporting and investment activity to examine managerial behavior and firm’s profitability to examine firm performance. For a sample of U.S. firms from 2004 to 2008, our results show that abnormal D&O insurance is positively associated with aggressive reporting, aggressive investment activity, and abnormal profit performance. Our results hold even after controlling for endogeneity and serial correlation in the data.

This paper investigates the effects of directors and officers (D&O) liability insurance on default risk. Using unique panel data of non-financial listed firms in Taiwan from 2010 to 2017, the empirical results indicate that D&O insurance exerts a significantly positive influence on firms' expected default frequency (EDF), controlling for the endogeneity of D&O insurance coverage and fixed effects. Further analyses reveal that such an effect exists particularly among firms with a high D&O insurance coverage ratio. Firms with D&O insurance have higher default risk than those without. Our findings differ from those in the existing literature by showing that D&O insurance coverage reflects firms' EDF and by capturing more insight on firms' EDF (market value, stock return volatility and firm asset volatility). The evidence indicates that D&O insurance may serve as a real-time, publicly observable signal of default risk for insurers and investors, enabling better contracting and risk management.

About Authors

This study investigates the effect of directors and officers liability insurance (hereafter, D&O liability insurance) on audit effort of auditors. D&O liability insurance is a liability insurance payable to top executives of a company as indemnification for losses or litigation costs from the lawsuits. Companies carry D&O liability insurance for the purpose of protecting their directors and officers from the legal actions. However, according to prior studies, the managers of their companies with D&O liability insurance may become more risk averse, and they take more risks for their decision. If D&O liability insurance causes more risks at the company, auditors for the companies may use the information of D&O liability insurance as a risk factor at the audit engagement. This study examines whether D&O liability insurance has a significant influence audit effort of auditors empirically. We use the mandatory disclosed Korean data of D&O liability insurance for testing the association between D&O liability insurance and audit effort. From the results, we find that auditors use D&O liability insurance information for setting the amount of audit effort. Also, both Big4 and Non-Big4 use D&O liability insurance as useful informaion.

Deposit-taking SACCOs in the North Rift Region of Kenya face significant financial performance issues that impede their ability to effectively serve their communities and sustain long-term growth. Therefore the study sought to assess the effect of financial innovation on financial performance of deposit-taking Saccos in North Rift Region, Kenya. Specifically, the study sought to assess the effect of product innovation, process innovation and organizational innovation on the financial performance of DT-SACCOS in the North Rift region. The study was anchored on the Schumpeter’s theory of innovation, transaction cost innovation theory, innovation diffusion theory and dynamic capabilities theory. The study employed a causal research. The unit of analysis was 30 deposits taking SACCOs licensed by SASRA in the North Rift Region. The unit of observation was 408 employees working with the with these SACCOs. The study used Slovin formula to obtain a sample size of 202 respondents. Secondary and primary sources of data were used to meet the objectives. The study assessed content validity, face validity and construct validity. Secondary data was collected through data google sheet to collect data on net income and average total assets for all the Saccos. Descriptive statistics was employed in this study to determine general trends of the related variables. The study used multiple linear regression to determine the extent to which independent variable predicted the dependent variable. The findings revealed that product innovation had a strong positive correlation with ROA. In addition, the findings revealed that process innovation showed an even stronger positive correlation with ROA. Finally, the findings revealed that organizational innovation was positively correlated with ROA. Based on the findings the study concludes that product innovation had a significant effect on the on financial performance of deposit-taking Saccos in North Rift Region, Kenya. In light of the findings the study recommends that the Deposit-Taking SACCOs (DT-SACCOS) should embrace a culture of innovation by encouraging creativity, experimentation, and continuous improvement within the organization. In addition, regulators and policy makers should develop supportive regulatory frameworks and policies that encourage innovation, competition, and entrepreneurship within the SACCO sector. Keywords: Financial Innovation, Product Innovation, Process Innovation, Organizational Innovation, Financial Performance.

The development of green dynamic capabilities in the educational sector of China is playing a great role for the institutes by offering green opportunities to teachers and students through which they can get inspired to accept the ecological administration to supplement the green reputation of the institute and thus gain a competitive advantage. The present study thus has been conducted to evaluate the effect of green dynamic capabilities, innovative finance and green innovation strategy on green innovation with the mediating role of green value co-creation. To further carry out the research, a quantitative-based survey methodology has been used to collect data from 350 China’s teachers who were teaching in various universities. The received complete questionnaires were 330 that were later analyzed using SPSS and AMOS. Results indicated that there is a significant relationship between GDC and GI. Innovative finance also significantly impacts green innovation. The green innovation strategy also significantly impacts green innovation. Mediation of green value co-creation was significant between GDC and GI, IF and GI and GIS and GI. In addition to a valuable enhancement in the growing body of literature, this study contributes by assisting the education sector to adopt such practices as defined in the paper. It may also contribute to helping the policymakers to develop policies that are related to green innovation. Furthermore, the paper explores the green financial aspect for organizations. So, this study has multiple theoretical and practical contributions.

This study examines the relationship between firms’ directors and officers (D&O) liability insurance and firm performance during the COVID-19 pandemic in Taiwan. It has been found that while the COVID-19 pandemic has had a negative impact on firm performance, D&O insurance indeed significantly mitigates this negative impact. Specifically, with 2,924 firm-year observations of 1,462 listed firms in Taiwan in the years of 2018 and 2020, we show that D&O insurance reduces the negative impact of the COVID-19 pandemic on net operating revenue by approximately 20 percent for insured firms. The main contribution of this article is that it provides valuable information for firms and investors by providing direct evidence that clearly shows the association between D&O insurance and firm performance during unexpected significant external shocks such as a pandemic.

Globally, technology business incubator (TBI) has become a growing initiative to promote the entrepreneurship. Recently TBIs has gained significant attention from research scholars and play a vital role to facilitate the development of entrepreneurial society. The institutions are established and leadership is groomed via entrepreneurial society. Moreover, entrepreneurial culture encourages the entrepreneurial society for economic development, innovation, technology competitiveness and sustainable job creation. A government backed TBI, Plan9, is presented to highlight the significance towards developing an entrepreneurial society in a developing country context, Pakistan. Plan9 has introduced unique practices with a broad vision for a sustainable entrepreneurial growth. University industry linkages are created, entrepreneurial education and training programs for social awareness are operationalized, innovative ideas are encouraged and financial innovation without equity share and funding support are designated. This paper presents a comprehensive spotlight over the dynamic capabilities and entrepreneurial culture of plan9. Furthermore plan9 is encouraging to promote entrepreneurial society, institutional development and leadership. Lastly this research recommends that the other TBIs should be initiated by the collaboration of government and private sector to nurture the entrepreneurial society.

Digital transformation has fundamentally changed television broadcasting management in Southeast Asia. This study examines two countries, Indonesia and Malaysia, which are at different stages of digital adoption. A qualitative research method with a case study approach is used, combining an international literature review, policy documents, and semi-structured interviews with broadcast practitioners. Thematic and comparative analysis, framed by the Dynamic Capabilities Framework, uncovers three main aspects: (1) organizational restructuring and multi-platform strategies; (2) technology adoption including DVB-T2 infrastructure, IP-based production systems, and AI for content recommendation; and (3) business model innovation through digital revenue diversification (YouTube, programmatic advertising, and OTT). The results show that Malaysia benefits from centralized policies and early infrastructure readiness, while Indonesia still faces challenges of decoder ownership, regional digital divide, and legacy-new system integration. Both countries emphasize the importance of human resource training, public-private collaboration, and incentive policies to accelerate digital adoption. Recommendations for the study include strengthening dynamic organizational capabilities, funding innovation, and digital literacy programs for the community. These findings provide strategic guidance for stakeholders to optimize broadcasting management in the digital era, towards an inclusive, adaptive, and sustainable ecosystem.

PurposeAccording to reputation theory, enterprises that adopt a proactive approach to corporate social responsibility (CSR) are known to actively invest in corporate innovation. However, this theory does not fully explain the mechanisms through which CSR influences corporate innovation, nor does it address how to effectively amplify CSR’s positive impact on innovation. To overcome these limitations, this research aims to incorporate the theories of innovation investment and dynamic capabilities. Innovation investment theory elucidates how CSR can attract additional financing, which can be directed toward innovation activities. Meanwhile, dynamic capabilities theory highlights how digital transformation in enterprises can enhance the positive effects of CSR on innovation, providing insights from both theoretical and empirical perspectives.Design/methodology/approachTo demonstrate the mediating role of debt financing costs and the moderating role of enterprise digital transformation in the mechanism of CSR on corporate innovation, this research conducts fixes effects models by collecting 27,912 data points from 3,775A-share China-listed enterprises, ranging in period from 2010 to 2020. Empirical research once again proves that the theories of innovation investment and dynamic capabilities effectively compensates for the shortcomings of reputation theory. These three theories effectively explain that what is the effect of CSR on enterprise innovation? How does CSR influence corporate innovation? And through what mechanisms can CSR better enhance corporate innovation?FindingsAccording to innovation investment theory, the cost of debt financing mediates the positive relationship between CSR and corporate innovation. This occurs because enterprises with robust CSR practices are more likely to secure external funding, thereby reducing their costs associated with external debt financing. Lower debt financing costs provide a stable source of funds for corporate innovation. Additionally, dynamic capability theory suggests that enterprise digital transformation moderates the positive relationship between CSR and corporate innovation. Building on these insights, it is recommended that enterprises, especially state-owned ones, should prioritize technological innovation to enhance their competitiveness.Research limitations/implicationsThis research aims to address and narrow the knowledge gap regarding the relation between CSR and corporate innovation through theoretical and empirical analyses. With respect to the influence mechanism, this research solely based on innovation investment theory and dynamic capabilities theory, focuses on the influence mechanism of CSR on corporate innovation, with the debt financing costs as the mediating variable and digital transformation as the moderating variable. However, the influence mechanism turns out to be complicated and there is room for further exploring numerous mechanisms. For example, future research can focus on identifying additional channels through which CSR exerts an influence on corporate innovation based on TOE theoretical framework.Practical implicationsThis research presents several strategies to enhance corporate innovation based on its conclusions: First, enterprises should promptly publish social responsibility reports to build a positive industry reputation. Moreover, by actively participating in CSR activities, they can strengthen their networks and enhance their industry standing. Second, the significant mediating role of debt financing costs should not be ignored. Enterprises are encouraged to seek diverse financing channels to reduce financial pressures, address financing challenges and facilitate the coordinated development of CSR and innovation. Third, enterprise digital transformation significantly affects the impact of CSR on innovation. Therefore, enterprises should advance digital transformation initiatives that incorporate technological innovation, organizational improvements and integration with supply chain partners. Finally, it has been noted that state-owned enterprises are often less responsive to technological innovation than their non-state counterparts. SOEs could redefine the scope and priorities of their social responsibilities to prevent excessive resource consumption that could hinder innovation. For instance, integrating some of their social responsibilities with innovation projects could promote both social and technological innovation objectives. Additionally, the government could ensure fair resource distribution among different types of enterprises and provide an equitable financing platform to mitigate financial challenges for both state-owned and non-state-owned enterprises.Originality/valueReputation theory does not fully elucidate the mechanisms by which CSR influences corporate innovation or how to effectively enhance CSR’s positive impact on innovation. This research integrates the theories of innovation investment and dynamic capabilities to address these gaps. According to innovation investment theory, debt financing costs mediate the positive relationship between CSR and corporate innovation. Meanwhile, dynamic capabilities theory posits that enterprise digital transformation moderates this positive relationship, further strengthening the impact of CSR on innovation.

As ESG (Environmental, Social, and Governance) issues draw increasing attention, Directors and Officers (D&O) liability insurance has emerged as a critical tool in corporate risk management, playing a positive role in enhancing corporate governance and reducing operational risks. Against this backdrop, preventing ESG decoupling is essential for achieving sustainable and high-quality development. Based on data from A-share listed companies between 2007 and 2023, this study investigates the impact of D&O insurance on corporate ESG decoupling. The empirical results indicate that D&O insurance significantly mitigates ESG decoupling, with the effect being statistically significant at the 1% level. Specifically, D&O insurance alleviates ESG decoupling primarily by easing firms financing constraints, curbing managerial short-termism, and increasing R&D investment. These findings provide robust empirical evidence for the role of D&O insurance in promoting sound and high-quality corporate development and offer valuable insights for policy formulation and corporate management practices.

The Purchase of Insurance by a Risk-Neutral Firm for a Risk-Averse Agent Abstract In the purchase of insurance by a risk-neutral firm for a risk-averse prospective employee, the firm must offer the prospect a compensation package consisting of a fee, or salary, and an insurance policy. In designing this policy, the firm is constrained by the utility function of the prospect: the firm seeks the least-cost compensation package that will induce the prospect to accept the firm's offer of employment. Because the risk aversion of the prospect constrains the choices of the firm, this problem is referred to as that of an employee-constrained firm (ECF). The specific ECF situation discussed here concerns a firm that wishes to hire an outside board member. After considering the comparative-static effects of changes in model parameters, the model is extended to permit price to serve as a proxy for risk. A comparison of the ECF-model implications with those obtained from a model of the purchase of insurance by a risk-averse consumer indicates that, even though the ECF is risk neutral, it behaves in some respects as if it were risk averse. Authors have investigated the purchase of insurance by a risk-averse consumer (e.g., Arrow, 1984; Mossin, 1968; Ehrlich and Becker, 1972). Mayers and Smith (1982) considered the risk-averse corporate buyer of insurance, focussing on improvements in risk-sharing and on potential reductions in transaction costs, contracting costs, tax liabilities, and incentives for improper investment decisions (see also Mayers and Smith, 1986; Main, 1983; Smith and Witt, 1985). In this article a third type of insurance purchase is considered: the purchase of insurance by a risk-neutral firm for a risk-averse prospective employee. To induce the risk-averse prospective employee to accept its offer of employment, the firm must offer a compensation package consisting of a fee, or salary, and an insurance policy. In designing the compensation package, the firm is constrained by the utility function of the prospect; that is, the firm seeks the least-cost compensation package that will induce the prospect to accept the firm's offer of employment. As a result, the risk aversion of the prospect constrains the choices of the firm; thus this problem is referred to as that of an employee-constrained firm (ECF). One prominent example of the ECF insurance purchase is director and officer (D&O) liability insurance, which is designed to cover the errors and omissions of board members and company officers. As Hancock (1988a) explains, The director and officer liability insurance policy has two parts. The first part directly insures the directors and officers against liability for errors and omissions. The second part insures the corporation for the amounts of money it may have to pay the directors and officers by reason of indemnification for errors and omissions of the directors and officers under either the state corporation law or the company's charter or bylaws (p. 2007). D&O insurance is not intended to cover dishonest or intentionally wrongful behavior. Moreover, D&O insurance does not cover the corporation, except for the expense of indemnifying board members. If the reimbursement of the corporation for indemnification of its officers and directors were the sole purpose of the D&O policy, then the firm's decision to forego self-insurance and purchase insurance might well reflect the determinants discussed by Mayers and Smith (1982). The D&O policy is also designed to cover situations in which the company cannot indemnify the directors and officers. This inability may arise from public-policy constraints, restrictions in the corporation's charter and bylaws, or the financial status of the corporation (Hancock, 1988a). …

Directors and supervisory board members (officers) are increasingly being held personally liable. Directors & Officers (D&O) liability insurance offers directors and supervisory board members ample protection against directors' and officers' liability. On the one hand, this has many advantages for the directors and supervisory board members, the company and other concerned parties. It implies, for instance, that it is easier for a company to attract good directors. With a D&O insurance policy, there are also improved means of recovery for parties that have been injured, which also positively affects the compensatory and preventive functions of liability law. On the other hand, due to the presence of D&O insurance, there are fewer financial incentives vis-a-vis directors and officers to act with due care – the moral hazard. As a result, the preventive function of liability law is, in principle, undermined, or at least negatively affected, by the D&O insurance. D&O insurers can, however, take various measures in an attempt to mitigate the moral hazard. For potential injured parties, the company, the insurer and society, those measures are of tremendous importance for ensuring the risk of damage/loss remains as low as possible. Field research shows, however, that the moral hazard is being insufficiently addressed by D&O insurers in the Netherlands. There are restrictions to the instruments that the Dutch D&O insurers are currently using to reduce the moral hazard. What is more, not all possible instruments are being used. This most likely also holds true for D&O insurers in other European countries and in the United States (in light of the research of Baker & Griffith 2010). It is, however, necessary to ensure that the moral hazard is optimally addressed and that the incentives for careful acts of management from liability law continue to be retained as much as possible. That is why it is desirable for D&O insurers to start implementing a retention for the Side A coverage for (the liability of) directors and officers.