Officers Liability Insurance Research Articles

Does Directors and Officers Liability Insurance Exacerbate Management Short-Termism?

This paper utilizes data from publicly listed companies spanning the years 2008 to 2022 to examine the influence and underlying mechanisms of Directors and Officers Liability Insurance (D&O insurance) on management short-termism. The analysis reveals that the acquisition of D&O insurance exacerbates the level of short-termism among corporate executives. This result withstands robustness tests employing various fixed effects, additional control variables, and sub-samples. The further mechanism analysis has discovered that the purchasement of D&O insurance exacerbates the management short-termism by alleviating corporate financing limitations, resulting in enormous influence among enterprises in large scales and companies that are not supervised by the big four accounting organizations.The findings of this research contribute valuable considerations for listed companies contemplating the acquisition of D&O insurance, offering meaningful insights for both corporate entities and regulatory authorities.

Directors and officers liability insurance and the wealth effect of M&A announcements

ABSTRACT We explore the association between Directors and Officers Liability Insurance (D&O insurance) and the valuation of mergers and acquisitions (M&As) from the perspective of the monitoring hypothesis versus the moral hazard hypothesis. Examining a sample of 278 M&A announcements made by listed firms in Taiwan from 2009 to 2020, our study finds that high D&O-insured acquiring firms are associated with producing better benefits for shareholders through M&A channels than low-insured firms. Such a positive relationship is more evident for acquirers with higher agency problems, indicating that D&O insurance assists in weakening the conflict between managers and shareholders and serves as a viable substitute for traditional corporate governance, effectively taking on the role of an external monitoring channel. Further analyses reveal that D&O insurance is associated with improvement in the post-M&A operating performance. Overall, the evidence supports the monitoring hypothesis, implying that acquirers holding high-level D&O insurance are more likely to deter opportunistic managerial behaviours and enhance the corporate monitoring quality, thereby exerting a positive influence on valuation from M&A transactions.

Does directors and officers (D&O) liability insurance help a company increase efficiency during the COVID-19 pandemic?

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.

Economic policy uncertainty and directors and officers liability insurance: a perspective on capital market pressures.

This study investigates the effects of economic policy uncertainty (EPU) on corporate purchases of directors and officers liability insurance from the perspective of capital market pressures. Using data on A-share Chinese listed firms from 2010 to 2021, our theoretical analysis and empirical tests reveal that higher levels of EPU increase purchases. The theoretical analysis and mediating tests reveal that capital market pressures play a mediating role in the relationship between EPU and purchases. This study also finds that the indirect ways in which EPU increases purchases consider the need for firms to mitigate litigation risks and take advantage of insurance governance. The heterogeneous analysis and tests reveal that EPU increases purchases more significantly in firms that have higher managerial agency costs, have lower corporate transparency, and are in industries with higher competition. The findings are significant for improving the risk management system in China's capital markets.

Why do firms purchase directors and officers liability insurance? – a perspective from short selling threats

This study examines the role of increased short selling threats in firms’ directors and officers liability insurance (D&O insurance) purchase decision against the backdrop of the Chinese deregulation of short sale. Using a difference-in-differences (DiD) research design, we demonstrate a positive effect of short selling threats on firms’ likelihood of purchasing D&O insurance policies after controlling for the known determinants of D&O insurance. We then perform tests to validate the DiD analysis result, including a test of the parallel trend assumption and placebo tests. To shed light on the mechanism through which the effect of short selling takes place, we perform a path analysis. The results reveal that firms’ litigation risk explains the effect of short selling pressure on D&O insurance purchase decision. Further cross-sectional analyses show that the positive effect of short selling threats on D&O insurance is ameliorated when firms have strong internal control or have great analyst coverage.

The Dilemma and Way out of the Application of Directors and Officers Liability Insurance Contracts in China

The Dilemma and Way out of the Application of Directors and Officers Liability Insurance Contracts in China

Directors and officers liability insurance and maturity mismatch: evidence from China

ABSTRACT We investigate the impact of the purchase of Directors’ and Officers’ liability insurance (D&O insurance) on a firm’s risk-taking behaviour in China, measured by the firm’s maturity mismatch ratio. Using a unique manually collected dataset, we find a significant positive relationship between a firm’s purchase of D&O insurance and the firm’s maturity mismatch ratio, which supports the moral hazard theory. The mechanisms of our main finding are corresponding internal and external monitoring, in which the main finding is only significant for firms under weak monitoring. Our result remains significant after employing several approaches to alleviate potential endogeneity concerns, including an alternative sample and the sensitivity test model. Our paper sheds some extra light on the issue related to D&O insurance in a country with inadequate internal supervision and weak investor protection and the determinant of a firm’s maturity mismatch ratio.

A Study on the Impacts of the Directors ＆ Officers Liability Insurance on Corporate Governance─Evidence from the Nederland

A Study on the Impacts of the Directors ＆ Officers Liability Insurance on Corporate Governance─Evidence from the Nederland

A Study on Recent Trends of Directors and Officers Liability Insurance

A Study on Recent Trends of Directors and Officers Liability Insurance

Directors and Officers Liability Insurance and Maturity Mismatch: Evidence from China

Directors and Officers Liability Insurance and Maturity Mismatch: Evidence from China

Directors and officers liability insurance and default risk

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.

Outcome model or substitute model of D&O insurance on IPO pricing without information asymmetry before issuance

Because of information asymmetry and agency costs associated with investment bankers, initial public offerings (IPOs) are severely underpriced in many countries. Furthermore, investors may sue the managers of an IPO firm if the stock trading price decreases after stock issuance. Therefore, to mitigate the litigation risk, IPO firms purchase directors and officers (D&O) liability insurance. This study proposes outcome and substitute models of D&O insurance risk avoidance to examine whether holding D&O insurance influences IPO pricing. The outcome model implies that firms purchase D&O insurance owing to directors' and officers' conservative stance and reluctance to take aggressive decisions. The substitute model implies that directors and officers are aggressive when they have D&O insurance. Our empirical results support the outcome model, which is based on information concerning retail subscription, suggesting that firms purchase D&O insurance because directors and officers are conservative. However, IPO firms under D&O insurance coverage become aggressive when making pricing decisions, as evidenced by the strong retail subscription; thus, the substitute model dominates.

Insured Capacity: Owner‐Designee Directors Should Not Take Their D&O Coverage for Granted

Daniel J. Struck is partner at Culhane Meadows, a Dallas‐based law firm serving major corporations and emerging companies across industry. In this article, he discusses some of the complexities of directors and officers liability insurance and the protections and limitations it can offer corporate boards in light of a changing, and newly activist, corporate landscape.

임원배상책임보험 약관의 해석과 명시 · 설명의무 - 대법원 2019. 1. 17. 선고 2016다277200 판결을 중심으로 -

임원배상책임보험 약관의 해석과 명시 · 설명의무 - 대법원 2019. 1. 17. 선고 2016다277200 판결을 중심으로 -

Managerial overconfidence and directors' and officers' liability insurance

The study investigates how CEO overconfidence impacts a firm's decisions on directors and officers (D&O) liability insurance over the 2008–2014 period for nonfinancial firms listed on the Taiwan Stock Exchange. We find that the effect of CEO overconfidence on the D&O insurance decision is significantly different between family and nonfamily controlled firms. Family firms with overconfident CEOs have higher demand for D&O insurance, particularly when the CEOs are family members. In contrast, nonfamily firms with overconfident CEOs tend to purchase less D&O insurance. These results are robust to the consideration of endogeneity concerns, and to alternative measures of family-controlled firms, CEO overconfidence, and D&O insurance coverage. This study provides the first empirical evidence regarding the role of managerial overconfidence in corporate D&O insurance decisions.

D&O Insurance and Corporate Governance: Is D&O Insurance Indicative of the Quality of Corporate Governance in a Company?

(Practically) all listed companies have Directors & Officers Liability insurance. Literature suggests that D&O insurance and, more in particular, the premium, can be indicative of the quality of corporate governance of a listed company. The idea is that a D&O insurer has an interest in properly identifying the corporate governance of a company and in reflecting this in the premium, since the quality thereof (partially) affects the risk of liability claims against directors and officers. However, a field study shows that D&O insurers in the Netherlands do not scrutinize the corporate governance of a company and that the findings are not or hardly reflected in the premium. The reason for this is that today, most listed companies comply with the corporate governance rules and - more importantly - the corporate governance on paper says relatively little about what the corporate governance of a company is like in actual practice. For this reason, D&O insurers, in their risk assessment, mainly focus on the company’s character and culture. These D&O insurers expect that this for an important part determines how aspects of corporate governance are dealt with in practice. The character and culture of the company will also affect the directors and their actions. As such, the premium does contain a value judgement on the company’s risk profile, thereby giving an indirect signal on the quality of corporate governance. Set against the sum insured and the deductible/retention, which can also give (direct) signals on corporate governance, the premium can provide valuable information to investors and other parties involved. In that case, however, it must be possible to observe and compare the information against data of similar companies and against data on previous policy years. It is, therefore, recommended, partly with a view to the willingness to invest and the growth of capital markets, that listed companies (must) publish basic information on D&O insurance.

Effects of directors and officers liability insurance on accounting restatements

This study investigates the relationship between directors and officers liability insurance (D&O insurance) coverage and the probability of accounting restatements. The results show that when managers are covered by relatively higher levels of D&O insurance, they are more likely to restate their financial reports. Moreover, the findings indicate that D&O insurance coverage is related to core earnings restatements and income overstatements, suggesting that managers’ accounting policies are more aggressive when they have fewer legal liability concerns. Overall, these results provide consistent evidence that reducing managerial legal liability has the effect of encouraging managers to misstate reported earnings.

R&D intensity and firm valuation: effect of director and manager incentives

Using a sample of 5829 Taiwanese firm-year observations over the 2008-2012 period, we examine the relationship between R&D expenditure and firm valuation. For the whole sample, we find a significant positive association between R&D investment and firm valuation as measured by Market-to-book ratio. However, we also find the dummy variable for Director and Officers liability insurance to be a highly significant variable. Furthermore, we find that the positive association is only effective for the sub-sample of firms with D&O insurance. This is a natural experiment in which we see the critical moderating role played by the incentive of directors and officers as affected by D&O insurance in the relation between R&D spending and firm value.

Effects of Director and Officer Liability Insurance Coverage on Information Disclosure Quality and Corporate Fraud

ABSTRACTWe empirically test the monitoring role of director and officer (D&O) insurance coverage by investigating the association between D&O insurance coverage and the information disclosure quality and incidence of corporate fraud for firms listed in Taiwan. The empirical evidence reveals that a firm may raise the quality of information disclosure by purchasing D&O insurance. However, the empirical results do not support the monitoring effect of D&O insurance coverage on corporate fraud.

The Effect Of Directors And Officers Liability Insurance On Audit Effort

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.