Do Firms with Directorss and Officerss Liability Insurance Perform Better than Firms Without Such Insurance?

Abstract

We examine the relationship between existence of D&O insurance and firm performance measured by Tobin’s Q. Using a sample of 5,752 Taiwanese firm-year observations over the 2008 to 2012 period, we find a positive correlation between firm performance and existence of D&O insurance. Tobin’s Q of firms with the D&O insurance is over 10 percent greater than that of firms without the insurance. But such a positive association is spurious. After controlling for other factors that may affect firm performance such as ownership structure, board structure, financial leverage, firm profitability, R&D expense ratio, sales growth rates and firm size, the OLS results show that D&O insurance either does not affect or only weakly affects firm performance positively. Furthermore, after controlling for the endogeneity of the decision to buy the D&O insurance, all the coefficients of D&O insurance become insignificantly negative. The results suggest that whether to purchase D&O insurance is an endogenous corporate behavior. Our overall result is that existence of D&O insurance does not help improve firm performance. In addition, we find that firms with higher cash ratio, larger and more independent board are more likely to purchase the D&O insurance, while older firms are less likely to buy the D&O insurance.