Corporate governance and corporate social responsibility: Evidence from directors' and officers' liability insurance

Theoretical theories underpin the governance effect of directors' and officers' (D&O) liability insurance include agency costs and stakeholder interests. Motivated by mixed evidence on the corporate governance effects of D&O, we ask whether and how the directors' and officers' (D&O) liability insurance affects corporate social responsibility (CSR) performance in China, one of the largest and fastest growing economies in the world. We develop two contrasting hypotheses: (1) supervision and incentives versus (2) opportunism. To test these hypotheses, we rely on Chinese A‐share market data and fixed effect panel regressions, along with a battery of robustness checks, including Heckman sample selection bias, two‐stage least square instrumental variable (2SLS‐IV), difference‐in‐difference (DiD), propensity score matching (PSM) analyses. Consistent with supervision and incentives hypotheses and stakeholder theory, we find that D&O liability insurance significantly increases firm's CSR performance and firms renewing D&O liability insurance with the same insurers tend to have better CSR performance. Two possible mechanisms supporting this positive relation between D&O liability insurance and CSR performance are information transparency and accounting conservatism. Aside from theoretical contributions, our findings offer important practical contributions such as promoting D&O as external governance and ensuring the functions of D&O insurance comprehensively and correctly understood. Integrating D&O insurance with CSR can be viewed as an important business strategy by mitigating risks, enhancing reputation, ensuring legal compliance, and supporting responsible decision‐making.