Directors’ liability insurance and investment-cash flow sensitivity

Chia-Chung Chan (), Yung-Ho Chang (), Chia-wei Chen () and Yuwei Wang ()
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Chia-Chung Chan: Tunghai University
Yung-Ho Chang: Tunghai University
Chia-wei Chen: Tunghai University
Yuwei Wang: Marist College

Journal of Economics and Finance, 2019, vol. 43, issue 1, No 2, 27-43

Abstract: Abstract We examine the association between directors’ liability insurance and investment-cash flow sensitivity with listed firms in Taiwan. We find that directors’ liability insurance increases the investment-cash flow sensitivity. Specifically, insured firms are more likely to have excessive investment than uninsured firms given the same level of cash flow. This is the result of managerial opportunistic behaviors fueled by moral hazard inherent in directors’ liability insurance. Although managerial opportunism could certainly increase the likelihood of corporate wrongdoing, our results show that it could be mitigated by having improved regulation or corporate governance.

Keywords: Directors’ liability insurance; D&O insurance; Investment-cash flow sensitivity; Taiwan (search for similar items in EconPapers)
JEL-codes: G30 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s12197-017-9425-7

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