Directors’ And Officers’ Liability Insurance And Credit Cost Of Firms

As imported product,Directors’ and Officers’ Liability Insurance(D&O Liability Insurance)entered China’s capital market in 2002,and did not receive sufficient attention from China’s listed companies in the subsequent nearly two decades,the purchasing rate also kept low.However,D&O Liability Insurance has become a hot spot in China’s capital market due to the enforcement of the new Securities Law,Luckin Coffee financial fraud and the judgment of Kangmei Pharmaceutical financial fraud.On the other hand,credit financing is the main channel for external financing of listed companies in China.Based on the background that China’s economy is under downward pressure,reducing financing costs,especially financing costs of credit,will be a major task of China’s economic work.Current papers have proved that cost of debt can be influenced after firms purchase D&O Liability Insurance,but seldom treat credit cost as a research objective.Therefore,this thesis has theoretical and practical significance because the study which combines D&O Liability Insurance with credit cost of firms meets the trend of China’s capital market.Taking China’s listed companies on A-shares from 2013 to 2021 as the sample for this study,this thesis empirically analyzes the unbalanced panel data composed of the above companies and finds that after purchasing D&O Liability Insurance,the credit cost of firms will increase.This negative impact can be worsened when the duality of chairman and general manager exists and can be alleviated when a company choose auditors from more well-famous accounting firms through heterogeneity analysis of chairman and general manager duality and auditor choice respectively.After the analysis of mechanism,this thesis finds that a company’s risk(including total risk and idiosyncratic risk)will increase after purchasing D&O Liability Insurance.From the perspective of decision behavior,after a company purchases D&O Liability Insurance,its directors and executives will conduct more inefficient investment.The basic result is still reliable after robustness test.Although the conclusions of this thesis reveal the negative effects of D&O Liability Insurance,the analysis of heterogeneity and mechanism can provide ideas for China’s listed companies to make full use of the advantages of D&O Liability Insurance and avoid its shortcomings.Specifically,this thesis proposes some suggestions to regulatory authorities,listed companies and insurance companies from the perspective of corporate governance,information quality,information disclosure and the design of insurance contracts.