Research On D&O Insurance,Executive Overconfidence And The Inefficiency Of Investment

In recent years, academia have done an in-depth study on the relationship between the executive overconfidence and the inefficiency of investment, but so far there are only several internal governance mechanism such as ownership structure and board structure have been discussed as the solution of managers’ overconfidence bias. Few documents have involved the External governance mechanism to fix the investment inefficiency caused by managers’overconfidence.Director and officer liability insurance (Hereinafter referred to as D&O insurance) system has been established and developed for over80years. At the beginning of the21st century, China started to introduce this insurance in to our capital market. At present, domestic D&O insurance coverage rates still remain low. D&O insurance is a historical product of western capital market. There are several mixed opinion of the role of D&O insurance in corporate governance and its psychological impact on managers among academia. It is a certain innovation for this paper to involve D&O insurance in managerial overconfidence and corporate investment inefficiency research. We are hoping to enrich the solving mechanisms of managerial overconfidence and inefficient investment, also trying to provide a new direction for the future research and several empirical evidences for the future development of D&O insurers in our country.By adopting the combination method of normative research and empirical research, this paper carried out theoretical analysis and empirical test on the relationships between D&O insurance, managerial overconfidence and distort investment based on agency theory, corporate behavioral finance theory, D&O insurance needs theory.First, we put forward the research hypothesis through theoretical derivation and interpretation on the basis of the relevant literatures. Then we defined the measurement of managerial overconfidence and inefficient investment and built the multi-factor regression test model. Finally, we collect the D&O insurance data and financial data of year2003to year2012of listed companies in Shanghai and Shenzhen stock market to conduct Descriptive statistical correlation and regression analysis.Through these analyses our research comes to the following conclusions. First there is a significant positive relationship between managerial overconfidence and the over-investment decision, and there is a significant negative relationship between managerial overconfidence and insufficient investment. Second, D&O Insurance negatively affect the over-investment decision, this indicate that D&O insurance could weaken the excessive investment behavior conduct by overconfidence manager. This means D&O insurance may have governance effect at a certain extent and verifies the hypothesis of external supervisor D&O insurance.