Directors’ and officers’ liability insurance and corporate misconduct: Evidence from China

ABSTRACT

This study examines whether directors’ and officers’ liability insurance (D&O insurance) plays a governance role in the Chinese capital market. We hypothesize and find that D&O insurance restrains corporate misconduct and that this phenomenon is much more significant in state-owned enterprises (SOEs) than in non-state-owned enterprises (non-SOEs). We think purchasing of D&O insurance can import supervisors to mitigate agency costs caused by owner absence. When agency costs are high, SOEs with D&O insurance experience less corporate misconduct. Our study also finds that when the agency problem caused by owner absence is more serious in SOEs, the role of D&O insurance in corporate governance becomes increasingly important.

KEYWORDS:

• D&O insurance
• SOEs
• owner absence
• corporate misconduct
• non-state shareholders’ governance

JEL CLASSIFICATION:

• G30
• G32
• G34

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ According to Chen et al. (2012) finding, large shareholders have both the incentive and the ability to monitor the insiders’ behaviour. We use top25 (the percentage of total shares held by the second to the fifth largest shareholders of a listed firm) to capture the monitoring intensity by large shareholders, and top25 is a proxy variable of large shareholders’ supervision; the smaller the value of top25, the higher the agency cost.

² There are many punishment methods, such as warning, suspending the licence, ordering the suspension of production and business, confiscating illegal gains, market entry prohibition, and so on..

Additional information

Funding

The work was supported by the Beijing Institute of Technology Research Fund Program for Young Scholars [3220012222208]; Humanities and Social Sciences Youth Foundation, Ministry of Education of the People's Republic of China (22YJC790126).