Directors and officers liability insurance and default risk

Li-Su Huang ()
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Li-Su Huang: National Taichung University of Science and Technology

The Geneva Papers on Risk and Insurance - Issues and Practice, 2022, vol. 47, issue 2, No 6, 375-408

Abstract: Abstract This paper investigates the effects of directors and officers (D&O) liability insurance on default risk. Using unique panel data of non-financial listed firms in Taiwan from 2010 to 2017, the empirical results indicate that D&O insurance exerts a significantly positive influence on firms' expected default frequency (EDF), controlling for the endogeneity of D&O insurance coverage and fixed effects. Further analyses reveal that such an effect exists particularly among firms with a high D&O insurance coverage ratio. Firms with D&O insurance have higher default risk than those without. Our findings differ from those in the existing literature by showing that D&O insurance coverage reflects firms' EDF and by capturing more insight on firms' EDF (market value, stock return volatility and firm asset volatility). The evidence indicates that D&O insurance may serve as a real-time, publicly observable signal of default risk for insurers and investors, enabling better contracting and risk management.

Keywords: Directors and officers liability insurance; Default risk; Expected default frequency (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1057/s41288-020-00197-0

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