Study On The Effect Of Directors’ And Officers’ Liability Insurance On Corporate Behavior

If the directors,supervisors,and senior managers of listed companies violate the provisions of laws,administrative regulations,or the company’s articles of association and harm the legitimate interests of shareholders,shareholders may file a lawsuit and demand that they bear civil liability for compensation.Therefore,shareholder lawsuits have become a means to solve the classic agency problem and have played a deterrent effect on management.However,the purchase of directors’ and officers’ liability insurance(D&O insurance)for management by companies will reduce the litigation risk of managers related to such litigation,which may weaken the legal restraint mechanism and induce moral hazard issues.However,D&O insurance may also reduce agency costs and inhibit management’s opportunistic behavior by introducing external supervision by insurance companies.Therefore,it is particularly important to explore whether D&O insurance embodies self-interest tool for management or governance tool for corporate behavior.This paper empirically examines the impact of D&O insurance on corporate behavior,and selects the corporate strategic choice behavior,financialization behavior,innovation behavior and social responsibility behavior related to social and economic development in order to deepen our D&O insurance.The understanding of this is of enlightening significance for regulating the behavior of managers,improving corporate governance,and improving rules and regulations.This paper first discusses the institutional background of D&O insurance,and then reviews and sorts out the existing literature from the five aspects of D&O insurance,corporate strategy,financialization,innovation and social responsibility,and summarizes the domestic and foreign scholars’ research directions and shortcomings.Then,it defines the related concepts of D&O insurance and corporate behavior,and analyzes the theories related to the research content of this paper,including information asymmetry theory,principal-agent theory and risk decision theory,and puts forward the main hypotheses.Then,the panel multiple regression model was used to conduct empirical tests from the following four aspects:First,this chapter focuses on the overall strategic level and examines the impact of D&O insurance on the corporate strategic choice.The results show that D&O insurance significantly increases the corporate strategic radicalization.Risk-taking and financial constraints appear to be two underlying channels through which D&O insurance affects corporate strategy.In terms of mechanism effects,D&O insurance has the self-interest effect rather than the governance effect,which cause moral hazard among directors and officers,induce more opportunistic behavior.Second,focus the research perspective on the level of specific corporate behavior,starting from the degree of satisfaction of its own utility,according to the economy from strong to weak,first select the corporate financial behavior with higher short-term return,and analyze the relationship between D&O insurance and corporate financialization.The results show that D&O insurance improves the level of corporate financial asset allocation.The above conclusion is still valid after a series of robustness tests.Further research found that the “financialization effect” of D&O insurance only exists in companies with a high degree of financing constraints and weak external supervision,confirming that companies’ financial asset allocation is motivated by “investment substitution” of profit maximization,rather than the “reservoir”.Therefore,it is important to guide the corporate capital to return to the real economy.Third,select the corporate innovation behavior with greater positive externality,and explore the influence of D&O insurance on corporate innovation.The study found that the number of authorized patents and citations of invention patents has been significantly reduced for companies that purchase D&O insurance,and the total number of authorized patents and non-invention patents has increased significantly,indicating that companies are only improving strategic innovation output on the surface,but actually the above did not increase substantive innovation results.Further research found that when the company is located in a region where the level of investor protection is high,industry competition is high,managers account for a relatively high proportion of women,and there is a "great famine" experience,D&O insurance has a greater hindrance to substantive innovation.Is significant.These empirical results show that the active governance of D&O insurance is limited.Fourth,select the non-economical corporate social responsibility behaviors,and examine how the D&O insurance affects the impact of corporate social responsibility.The results show that D&O insurance increased the tax avoidance and debt levels,thereby reducing the degree of social responsibility performance and supports the managerial opportunism.At the same time,the negative effect of D&O insurance on corporate social responsibility is more obvious when there is less pressure on internal and external governance.In addition,the reduction of corporate social responsibility behavior brought about by purchasing D&O insurance is a long-term strategy that will damage the value creation,market performance and profitability of the company.The above results support the managerial opportunism hypothesis and suggest that the supervisory hypothesis is not valid.In short,the above research results indicate that D&O insurance’s role in China’s external governance is limited.On the contrary,it will induce more opportunistic behaviors of management,increase the aggressiveness of corporate strategies,increase the allocation of financial assets,reduce substantial innovation and reduce the degree of fulfillment of social responsibilities.This paper deeply reveals the internal connection between D&O insurance and corporate behavior,and provides references for insurance companies and supervisory authorities to improve the design and supporting measures of D&O insurance.