Directors' & Officers' liability insurance and financing decisions: Evidence from debt structure choice

Abstract

Using annual data for a group of Chinese listed firms over the 2010–2020 period, we investigate whether the purchase of Directors' and Officers' liability insurance alters the debt structure of Chinese firms, ceteris paribus. Using the two-stage least squares methodology, we find that such purchase persuades firm management to increase its long-term debt ratio, after controlling for several other factors that can influence this ratio. Several robustness tests reaffirm these findings. These results favor the monitoring effect theory over the moral hazard theory. The research results also show a significant negative correlation between the purchase of D&O Insurance and the cost of debt. The findings of this paper affirm the positive impact of buying D&O insurance on a listed firm's debt structure.