Unexpected discrimination: Does directors’ and officers’ liability insurance exacerbate credit mismatch?

Jing Wen, Xin Zhang and Lizhen Wang

Finance Research Letters, 2025, vol. 80, issue C

Abstract: Credit mismatch constrains firm growth and financial stability, particularly in emerging markets. While directors’ and officers’ liability insurance (D&O insurance) strengthens governance, its credit allocation remains unexplored. We pioneer in showing D&O insurance exacerbates credit mismatch in China by increasing interest costs for firms with above-average initial expenses, driven by credit provider’ risk discrimination instead of managerial opportunism. Heterogeneity analysis indicates that non-state-owned firms, firms with smaller supervisory boards, and firms with lower institutional shareholding experience stronger adverse effects, suggesting that weaker institutional credibility amplifies credit discrimination. However, digital technology adoption and corporate information disclosure help mediate this effect, reducing credit mismatch.

Keywords: Directors’ and officers’ liability insurance; Credit mismatch; Financial discrimination; Corporate governance; Emerging markets (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:80:y:2025:i:c:s1544612325006919

DOI: 10.1016/j.frl.2025.107431

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