Do bond market participants care about directors’ and officers’ liability insurance?——Empirical evidence based on the pricing of corporate bonds

Based on the risk hedging perspective, this paper examines the impact of directors’ and officers’ liability insurance (hereafter referred to as D&O liability insurance) on the pricing of corporate bonds. We find that the purchase of D&O liability insurance can effectively reduce corporate bond insurance pricing. The path test shows that the purchase of D&O liability insurance can reduce the bond insurance pricing by improving the quality of company’s internal control. Furthermore, the paper finds that when management power is greater, investor protection is poor or financial risk is high,the impact of the D&O liability insurance is stronger. After purchasing D&O liability insurance, creditors will reduce the use of corporate governance contractual terms, but will set more investments and financing as well as option contractual terms. In addition, companies that purchase D&O liability insurance issue bonds with higher credit ratings and longer bond maturities.