How do Family Ownership and Control Affect the Demand for Director and Officer Insurance?

Tzu Ching and Weng

Journal of Applied Finance & Banking, 2018, vol. 8, issue 6, 3

Abstract: Equity holdings of family firms represent an important form of company ownership in South-East Asia. In order to enhance the effectiveness of corporate governance, listed companies have been required to disclose more information on their director and officer insurance (hereafter D&O insurance) purchases in Taiwan. This publicly available data enables this study to investigate how family firms react to litigation risks in terms of their D&O insurance. Using the D&O insurance coverage of Taiwan firms as a proxy for management legal liability coverage, this study made two major findings. First, firms with a high concentration of family ownership face lower litigations risk and are less likely to purchase D&O insurance. However, firms with significant controlling-minority shareholder agency conflicts are more willing to purchase D&O insurance due to the entrenchment effect. Second, family firms with Type II agency problems tend to carry abnormally high D&O insurance coverage. Furthermore, I find that family firms with outside CEOs exhibit a greater likelihood of purchasing D&O insurance. These findings suggest that the decision of family firms to purchase or not purchase D&O insurance is primarily driven by Type II agency problems and the types of CEOs they have in place. JEL classification numbers: M41Keywords: Director and Officer Liability insurance, Family firms, Litigation risk

Date: 2018
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