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Directors’ and Officers’ Liability Insurance, Independent Director Behavior, and Governance Effect

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  • Ning Jia
  • Xuesong Tang

Abstract

We examine the effect of directors’ and officers’ liability insurance (D&O insurance) on the behavior of independent directors and the effectiveness of their governance role. Using a unique data set, we find a negative relation between D&O insurance and personal board meeting attendance by independent directors and a positive relation between D&O insurance and meeting attendance by authorized representatives. Content analysis of independent director opinion reports indicates that D&O insurance encourages independent directors to behave less responsibly. Insured independent directors are also more likely to be busy. Collectively, D&O insurance reduces the effectiveness of independent directors in corporate governance.

Suggested Citation

  • Ning Jia & Xuesong Tang, 2018. "Directors’ and Officers’ Liability Insurance, Independent Director Behavior, and Governance Effect," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 85(4), pages 1013-1054, December.
    • Handle: RePEc:bla:jrinsu:v:85:y:2018:i:4:p:1013-1054
    DOI: 10.1111/jori.12193
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    Cited by:

    1. Hu, Yuanyuan & Fang, Jiali, 2022. "Peer Effects in Directors’ and Officers’ Liability Insurance: Evidence from China," Finance Research Letters, Elsevier, vol. 47(PB).
    2. Sophie Wang, Qing & Lai, Shaojie & Pi, Shuwen & Anderson, Hamish, 2022. "Does directors' and officers' liability insurance induce empire building? Evidence from corporate labor investment," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    3. Jui-I Chang & Chen-Ying Lee & Geng-Yu Lin, 2021. "Real earnings management and borrowing costs: The moderating effect of the directors’ and officers' liability insurance," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 11(5), pages 1-3.
    4. Qi Wang & Maoxia Sun & Kongwen Wang, 2023. "Do Reputation Incentives Matter? Busy Directors and Corporate Social Responsibility in China," Sustainability, MDPI, vol. 15(6), pages 1-17, March.
    5. Xia, Changyuan & Yang, Junjie & Yang, Zeng & Chan, Kam C., 2023. "Do directors with foreign experience increase the corporate demand for directors' and officers' liability insurance? Evidence from China," Economic Modelling, Elsevier, vol. 119(C).
    6. Li, Tianshi & Yang, Tina & Zhu, Jigao, 2022. "Directors’ and officers’ liability insurance: Evidence from independent directors’ voting," Journal of Banking & Finance, Elsevier, vol. 138(C).
    7. Meng, Qingbin & Zhong, Ziya & Li, Xinyu & Wang, Song, 2023. "What protects me also makes me behave: The role of directors' and officers' liability insurance on empire-building managers in China," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    8. Bai, Jing & Tang, Xuesong & Zheng, Yuxin, 2023. "Serving the truth: Do directors with media background improve financial reporting quality?," International Review of Financial Analysis, Elsevier, vol. 85(C).
    9. Kong, Xiaoran & Xu, Siping & Liu, Ming-Yu & Ho, Kung-Cheng, 2023. "Confucianism and D&O insurance demand of Chinese listed companies," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    10. Shi, Chunling & Sun, Yaodong & Lyu, Jia, 2023. "D&O insurance, technology independent directors, and R&D investment," International Review of Financial Analysis, Elsevier, vol. 89(C).
    11. Jia, Ning & Mao, Xinshu & Yuan, Rongli, 2019. "Political connections and directors' and officers' liability insurance – Evidence from China," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 353-372.
    12. Hui Xia & Shixian Ling & Zhangxin (Frank) Liu & Sirimon Treepongkaruna, 2024. "Corporate governance and corporate social responsibility: Evidence from directors' and officers' liability insurance," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(4), pages 3006-3030, July.
    13. Songlian Tang & Lingfei He & Fei Su & Xiaoyun Zhou, 2024. "Does directors' and officers' liability insurance improve corporate ESG performance? Evidence from China," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 3713-3737, July.
    14. Su, Xuan-Qi, 2023. "Directors' and Officers' liability insurance and cross section of expected stock returns: A mispricing explanation," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    15. Huobao Xie & Can Lin, 2024. "Economic policy uncertainty and directors and officers liability insurance: a perspective on capital market pressures," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 49(3), pages 605-635, July.

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