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Directors’ liability insurance and investment-cash flow sensitivity

Author

Listed:
  • Chia-Chung Chan

    (Tunghai University)

  • Yung-Ho Chang

    (Tunghai University)

  • Chia-wei Chen

    (Tunghai University)

  • Yuwei Wang

    (Marist College)

Abstract

We examine the association between directors’ liability insurance and investment-cash flow sensitivity with listed firms in Taiwan. We find that directors’ liability insurance increases the investment-cash flow sensitivity. Specifically, insured firms are more likely to have excessive investment than uninsured firms given the same level of cash flow. This is the result of managerial opportunistic behaviors fueled by moral hazard inherent in directors’ liability insurance. Although managerial opportunism could certainly increase the likelihood of corporate wrongdoing, our results show that it could be mitigated by having improved regulation or corporate governance.

Suggested Citation

  • Chia-Chung Chan & Yung-Ho Chang & Chia-wei Chen & Yuwei Wang, 2019. "Directors’ liability insurance and investment-cash flow sensitivity," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(1), pages 27-43, January.
    • Handle: RePEc:spr:jecfin:v:43:y:2019:i:1:d:10.1007_s12197-017-9425-7
    DOI: 10.1007/s12197-017-9425-7
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    References listed on IDEAS

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    More about this item

    Keywords

    Directors’ liability insurance; D&O insurance; Investment-cash flow sensitivity; Taiwan;
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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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