The corporate paradox : economic realities of the corporate form of organization

Abstract

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Why do firms purchase directors' and officers' liability insurance? – perspective from economic policy uncertainty

“…This understanding is crucial because D&Os' demand for insurance can be driven by opportunistic motives and managerial moral hazard (Lin, Hsu, Chou, Chao & Li, 2020;Park, 2018) or by justifiable economic conditions, and the motives are often unobservable. Given the beneficial effect of D&O insurance on firms' incentives to take on projects that are risky but with a positive net present value (NPV) (Cortenraad, 2000) and on firms' innovations (Wang et al, 2020), our finding indicates that facing uncertain economic policies, stakeholders can be more receptive and supportive to D&Os' request for the insurance so that D&Os do not shun value-enhancing investment activities.…”

“…Empirical studies provide corroborative evidence for this argument, indicating that firms that purchase D&O insurance tend to take on risky but positive NPV projects (Cortenraad, 2000), conduct innovations (Wang et al, 2020), have lower future stock price crash risk, have a lower likelihood of financial restatements and more corporate social responsibility reports among Chinese listed firms (Yuan et al, 2016) and avoid costly real earnings management by Taiwanese listed firms (Chang & Chen, 2018). Nevertheless, opponents contend that protecting D&Os from litigation risk by providing them with D&O insurance entices managerial opportunism and potentially decreases their due diligence and accountability (Baker & Griffith, 2010;Lin et al, 2011).…”

The impact of directors’ and officers’ liability insurance on firm’s investment efficiency: evidence from China

“…Another line of research examines the indirect effects of D&O insurance by investigating its associations with firm-level outcomes and stakeholders' perceptions. Studies supporting the benefits of D&O insurance find that firms purchasing D&O insurance are more inclined to undertake risky projects with positive net present value (Cortenraad, 2000), engage in innovation (Wang et al, 2020), avoid costly real earnings management (Chang and Chen, 2018), exhibit more conservative earnings (Liao et al, 2016), have a lower likelihood of restating financial statements and are more likely to disclose separate corporate social responsibility reports, thereby reducing stock price crash risk (Yuan et al, 2016). Li et al (2022b) find that Chinese debt holders perceive D&O insurance coverage positively, as evidenced by charging lower bond credit spreads to firms purchasing such insurance.…”