Does Directors’ and Senior Managers’ Insurance Deter Financial Asset Allocation? Empirical Evidence from Non-financial Listed Companies in 2007–2019

Abstract

Under the new normal economy, the real economy continues to weaken and the virtual economy continues to expand, which will cause non-financial companies to sacrifice long-term value for short-term results. As a result, financialization has increasingly become an important obstacle to the development of the main business. How to restrain financialization and promote the development of real industry has drawn much attention in government and academia, but the existing literature does not discuss much about its governance measures, especially from the perspective of stakeholder governance. Therefore, this paper studies the relationship between directors’ and senior managers’ insurance and financial asset allocation from the perspective of insurance governance, and establishes transmission mechanisms based on information and governance effects. Eliminating heteroscedasticity and addressing endogenous concerns with the 2SLS method, the study finds that directors’ and senior managers’ insurance can deter financial asset allocation, supporting the effective supervision hypothesis; in terms of the mechanisms, directors’ and senior managers’ insurance deters financial asset allocation through the information effect and the governance effect, that is, by improving the quality of earnings information and strengthening external supervision. Furthermore, the investigation reveals that directors’ and senior managers’ insurance can improve industrial investment and its efficiency; the long-term financial asset allocation contributes to the negative impact of directors’ and senior managers’ insurance on financial asset allocation; it the negative relationship between directors’ and senior managers’ insurance and financial asset allocation is more obviously after 2012; that the policy of accelerating the development of liability insurance in 2014 can enhance the deterrent effect of directors’ and senior managers’ insurance on financial asset allocation. After examining the economic consequences, the empirical results show that the negative impact of directors’ and senior managers’ insurance on financial asset allocation further improves investment efficiency and reduces operating risks. The findings indicate that directors’ and senior managers’ insurance can balance the interests of various stakeholders, and enable companies to make strategic investments, which are related to the overall layout, long-term development and future planning of companies, and to maintain vigilant against financialization. In theory, the conclusions help to clarify the inconclusiveness of the governance effect of directors’ and senior managers’ insurance, and enrich the “investment-centric theory”. In practice, the conclusions help to understand the internal logic of insurance contract governing financialization and reducing agency cost, and provide a reference for regulatory authorities to develop the directors’ and senior managers’ insurance market, govern financialization, and promote the economy to “shift from virtual to real”. At the same time, it is helpful for companies to improve corporate governance mechanisms, correct short-sighted behaviors, and promote long-term growth.