Directors And Officers Liability Insurance,Management Risk Appetite And Corporate Investment Efficiency

Investment decisions made by directors and managers are critical to the operation of a business and investment efficiency is an important indicator of a company’s business performance.In this complex and volatile economic environment,where the inherent uncertainty of investment makes it difficult for managers to make satisfactory decisions,directors’ liability insurance is receiving increasing attention as a risk hedging mechanism to provide confidence in management decisions.In the face of the current challenges posed by accelerating internationalisation and rapid changes in science and technology,the potential for negligence in investment decisions is increasing due to the different risk appetites and limited experience of managers.This paper examines whether the introduction of liability insurance for board members can play an effective role in corporate governance and the impact of management’s risk appetite on the efficiency of corporate investment,taking into account the underlying circumstances in China.Based on principal-agent theory and risk preference theory,this study uses panel data from Chinese listed companies between 2010 and 2021 as the sample for the study.A fixed utility model is used to identify the impact of directors’ and officers’ liability insurance on firms’ investment efficiency is empirically analysed,and heterogeneity is analysed across firm nature and industries,and the paper further tests the mediating utility of management’s risk preference.In order to fully capture the governance effectiveness of directors’ liability insurance,this paper analyses the phenomenon of corporate over-investment and underinvestment based on the study of corporate investment efficiency.The study shows that directors’ liability insurance is effective in corporate governance and that the monitoring and underwriting role of directors’ liability insurance has significantly improved the efficiency of corporate investment and reduced the extent of corporate overinvestment and underinvestment.At the same time,taking out directors’ liability insurance increases the level of management’s risk appetite.According to risk appetite theory,the increased level of management’s risk makes management more decisive in making investment decisions,which,together with the external oversight of directors’ liability insurance,circumvents inefficient investment decisions and increases the level of corporate investment efficiency.This study can provide some ideas for board appointments and provide some empirical evidence to help companies decide whether to take out directors’ and officers’ liability insurance.