Directors' and officers' liability insurance and stock price crash risk

Rongli Yuan, Jian Sun and Feng Cao

Journal of Corporate Finance, 2016, vol. 37, issue C, 173-192

Abstract: We investigate the impact of directors' and officers' insurance (D&O insurance) on stock price crash risk. We find that D&O insurance in China is negatively associated with stock price crash risk. This association is robust to a series of robustness checks including the use of alternative sample, Heckman two-step sample selection model, propensity score matching procedure, fixed effects model, the inclusion of some possibly omitted variables, and bootstrap method. Further analyses show that the impact of D&O insurance on crash risk is more pronounced in firms with lower board independence, non-Big 4 auditors, lower institutional shareholdings, and weaker investor protection; and the negative relationship between D&O insurance and crash risk is not driven by the eyeball effect. Moreover, we find that D&O insurance purchase is associated with less financial restatements and more disclosure of corporate social responsibility reports. Our findings provide support to the notion that D&O insurance appears to improve corporate governance.

Keywords: Directors' and officers' liability insurance; Stock price crash risk; Corporate governance; Financial restatements; Corporate social responsibility (search for similar items in EconPapers)
JEL-codes: G12 G14 G22 G34 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (92)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:37:y:2016:i:c:p:173-192

DOI: 10.1016/j.jcorpfin.2015.12.015

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