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Does directors' and officers' liability insurance induce empire building? Evidence from corporate labor investment

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  • Sophie Wang, Qing
  • Lai, Shaojie
  • Pi, Shuwen
  • Anderson, Hamish

Abstract

This study examines whether directors' and officers' (D&O) insurance affects corporate employment decision-making. Using a 2006–2018 sample of Chinese public firms, we find that firms purchasing D&O insurance exhibit lower labor investment efficiency, reflected mainly in over-hiring. The findings are strengthened by a set of additional robustness tests to mitigate endogeneity concerns and selection bias. The negative relation between D&O insurance and labor investment efficiency is more pronounced in firms with weak corporate governance, a low proportion of female executives, high labor intensity and low legal risks. Further analysis suggests that inefficient labor investment leads to worse future firm performance. This study provides the first empirical evidence that D&O insurance increases managerial empire building tendencies via over-investment in labor, which, in turn, is detrimental to shareholder value.

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  • 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).
    • Handle: RePEc:eee:pacfin:v:73:y:2022:i:c:s0927538x22000488
    DOI: 10.1016/j.pacfin.2022.101753
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    More about this item

    Keywords

    D&O insurance; Labor investment efficiency; Corporate governance; Empire building;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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