The determinants of the purchase of D&O insurance in Taiwanese firms: Corporate governance and management turnover perspectives

Abstract

Accounting scandals in recent years have exposed that a high risk in business operations and caught the public attention. Thus, the Taiwanese government has strengthened the necessary regulations to protect shareholders’ rights, emphasizing breach of trust by managers and irresponsibility by board of directors (BOD). Situations such as class action lawsuits filed by investors against firms for deficiency in disclosures revealed that firms could purchase directors & officers liability insurance (D&O insurance) to reduce and diversify the potential risks that result in severe harms by management and board decisions. Our study also shows that decisions to purchase D&O insurance may influence the decision making process of BOD and high-level management, and it may even impact the likelihood of management turnover. The purpose of the study is to examine the main determinants that would influence the firm’s decision on whether to purchase D&O insurance. From empirical evidence, we find the purchase of D&O insurance is more likely when firms are greater in BOD independence, higher BOD average compensation, with greater high level management turnover, larger in size, and in the electronics industry. On the other hand, firms are less likely to purchase D&O insurance when there are higher frequencies in change of external auditors, greater deviation of ultimate controlling shareholders cash flow rights and equity control rights, and when firms are with greater in BOD directors serving as firm managers. However, no relationship is found for firms’ D&O insurance purchase relates to information disclosure transparency, and duality of CEO and BOD chairman