D&O Insurance,nature Of Property Right And Accounting Conservatism

As a long-standing financial reporting feature, conservatism is one of the most influential principles (or practices) in accounting history.The question of why the accounting conservatism can exist in the enterprise for a long time, and what the influencing factors are, this issue has been highly concerned by academics and practitioners in recent years.According to Watts (2003), litigation is one of the important causes of accounting conservatism.The size of the litigation risk faced by the firm is inseparable from the decision-making behavior of the directors and officers, and the choice of the accounting conservatism is based on their understanding of their own liability risk.With the continuous improvement of the legal system of the securities market and the strengthening of the investor's awareness of rights safeguarding, the probability of the directors and officers facing the shareholder litigation is also increasing,and they have a strong incentive to reduce their litigation risk.When companies purchased D&O insurance,directors' and officers' personal risk of litigation for compensation is transferred to the insurance companies.So, as a effective system to defense the directors and officers litigation risk, the introduction of D&O insurance can reduce the loss of corporate shareholder litigation claims, at the same time,whether it will have an impact on the firm's accounting conservatism and what impact?Furthermore, in the process of D&O insurance impact on the accounting conservatism, whether it is also affected by the nature of property rights? In other words, compared with the non-state enterprises, can D&O insurance on the role of accounting conservatism in the state-owned enterprises have a same play role? In view of the above problems, there are few literature to study this.In this paper, based on the analysis of the theory about liability insurance and asymmetric information theory, we think,similar to the creditor, as the insurer, the insurance company's revenue function is also symmetrical(that is to say,after the company bought the D&O insurance, they often tend to increase the motivation of adventure, if the adventure is successful, all the proceeds owned by the enterprise, and the insurer has nothing to do; but if the adventure fails, the insurance company may be sustain the litigation losses.It is this asymmetry of the income function, urging the insurance company to strengthen the supervision on the insured enterprises, and the supervision also can effect the enterprise's accounting policy to promote it more conservatism.In addition, compared with non-state enterprises, government intervention and protection and the absence of the owner in the state-owned enterprises are more serious.In this context, the supervisory effect of insurance companies on state-owned enterprises may be weakened, leading to the weakening of accounting conservatism.Based on the above analysis,this article choose the A-shared listed companies in Shanghai and Shenzhen from 2008 to 2015 as the research samples,to examine the relationship between D&O insurance and accounting conservatism.The results show that the introduction of D&O insurance can strengthens the accounting conservatism; furthermore, compared with non-state enterprises,the nature of state-owned enterprises has weakened the effect of D&O insurance on accounting conservatism.The research of this paper provides some empirical evidence to understand the governance role of D&O insurance in our country's enterprises,and also provides empirical experience for understanding the differences between the state-owned enterprises and non-state enterprises in the current market background.