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

Che-Chia Chang and Chia-Wei Chen

Asia-Pacific Journal of Accounting & Economics, 2018, vol. 25, issue 1-2, 199-217

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.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:taf:raaexx:v:25:y:2018:i:1-2:p:199-217

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DOI: 10.1080/16081625.2016.1253484

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Asia-Pacific Journal of Accounting & Economics is currently edited by Yin-Wong Cheung, Hong Hwang, Jeong-Bon Kim, Shu-Hsing Li and Suresh Radhakrishnan

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