Directors’ and officers’ liability insurance and accounting conservatism: empirical evidence from China

Wanjiao Jia, Shuoshuo Bi and Yingjie Du

Managerial Auditing Journal, 2022, vol. 37, issue 8, 1091-1112

Abstract: Purpose - This study analyses Chinese data to revisit the relationship between directors’ and officers’ (D&O) insurance and accounting conservatism, aiming to investigate the impact of investors’ legal protection on the function of D&O insurance. Design/methodology/approach - The study sample included all A-share firms listed on the Shanghai and Shenzhen Stock Exchanges from 2006 to 2019. Multiple regression was used to investigate the association between D&O insurance and accounting conservatism. The Heckman two-stage model and the propensity score matching method were used to check the robustness of the main results. Findings - D&O insured companies exhibited greater accounting conservatism. The higher the indemnity limit, the more conservative a firm’s earnings reporting. The positive correlation was stronger when investor protection was relatively weak. The impact of D&O insurance on accounting conservatism was stronger for companies with weaker internal or external supervision mechanisms. Originality/value - The study findings show that D&O insurance plays a positive role in the governance of listed companies when investors’ legal protection is weak, which supports the effective supervision hypothesis of D&O insurance.

Keywords: Accounting conservatism; Investor protection; Directors’ and officers’ liability insurance; External supervision; Internal supervision (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:majpps:maj-10-2021-3353

DOI: 10.1108/MAJ-10-2021-3353

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