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Directors’ and officers’ liability insurance and the trade-off between real and accrual-based earnings management

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  • Che-Chia Chang
  • Chia-Wei Chen

Abstract

In this study, we examine whether directors’ and officers’ legal liabilities affect their choices of different means of earnings management. We focus on listed firms in Taiwan, where information on directors’ and officers’ liability insurance is publicly available. Consistent with prior studies, we find that insured firms are more likely to use accrual-based earnings management. However, we demonstrate that the level of overall earnings management is marginally lower for insured firms because they rely less on costly real earnings management. Our findings suggest that carrying directors’ and officers’ liability insurance may, to some extent, mitigate costs resulting from earnings management.

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  • Che-Chia Chang & Chia-Wei Chen, 2018. "Directors’ and officers’ liability insurance and the trade-off between real and accrual-based earnings management," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 25(1-2), pages 199-217, January.
    • Handle: RePEc:taf:raaexx:v:25:y:2018:i:1-2:p:199-217
    DOI: 10.1080/16081625.2016.1253484
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    Cited by:

    1. Chang, Che-Chia & Pan, Hunghua, 2020. "How do stock-for-stock acquirers manage earnings? The accruals feature of real earnings management," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(2).
    2. Chang, Che-Chia & Kao, Li-Han & Chen, Hsin-Yu, 2018. "How does real earnings management affect the value of cash holdings? Comparisons between information and agency perspectives," Pacific-Basin Finance Journal, Elsevier, vol. 51(C), pages 47-64.
    3. Meng, Qingbin & Wang, Song & Zhong, Ziya, 2024. "The effect of directors' and officers' liabilities insurance on corporate social responsibility evidence from China," International Review of Financial Analysis, Elsevier, vol. 93(C).
    4. 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.
    5. 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).
    6. Bilal Kimouche, 2022. "Accrual-based and cash-based earnings management in Algeria: substitution or complementary," Croatian Review of Economic, Business and Social Statistics, Sciendo, vol. 8(1), pages 1-17, June.
    7. Liao, Tsai-Ling & Chuang, Hwei-Lin & Wang, Jo-Yu, 2022. "Directors' and officers’ liability insurance and the pricing of seasoned equity offerings," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 12-26.

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