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Faithful or fearless: directors’ and officers’ liability insurance and management discussion and analysis tone manipulation

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  • Yi Ru
  • Wei Zhao
  • Zihao Su

Abstract

We examine whether directors’ and officers’ liability insurance (D&O insurance) influences managers’ strategic tone manipulation of management discussion and analysis. We find that D&O insurance is positively associated with upward tone manipulation. This association is more pronounced for firms with greater litigation risk or highly-motivated and overconfident managers. Additionally, we document more favorable short-term returns and intensive reversals responding to positive tones issued by D&O insurance-covered firms. Besides, D&O insurance-shielded managers may inflate the tone by reducing risk-factor information disclosures. Overall, our results support that D&O insurance can trigger managers’ unethical manipulations by reducing their expected personal legal liability.

Suggested Citation

  • Yi Ru & Wei Zhao & Zihao Su, 2025. "Faithful or fearless: directors’ and officers’ liability insurance and management discussion and analysis tone manipulation," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 32(1), pages 110-133, January.
    • Handle: RePEc:taf:raaexx:v:32:y:2025:i:1:p:110-133
    DOI: 10.1080/16081625.2023.2225536
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