Faithful or fearless: directors’ and officers’ liability insurance and management discussion and analysis tone manipulation

Yi Ru, Wei Zhao and Zihao Su

Asia-Pacific Journal of Accounting & Economics, 2025, vol. 32, issue 1, 110-133

Abstract: We examine whether directors’ and officers’ liability insurance (D&O insurance) influences managers’ strategic tone manipulation of management discussion and analysis. We find that D&O insurance is positively associated with upward tone manipulation. This association is more pronounced for firms with greater litigation risk or highly-motivated and overconfident managers. Additionally, we document more favorable short-term returns and intensive reversals responding to positive tones issued by D&O insurance-covered firms. Besides, D&O insurance-shielded managers may inflate the tone by reducing risk-factor information disclosures. Overall, our results support that D&O insurance can trigger managers’ unethical manipulations by reducing their expected personal legal liability.

Date: 2025
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DOI: 10.1080/16081625.2023.2225536

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Asia-Pacific Journal of Accounting & Economics is currently edited by Yin-Wong Cheung, Hong Hwang, Jeong-Bon Kim, Shu-Hsing Li and Suresh Radhakrishnan

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