A Research On The Impact Of Directors’ And Officers’ Liability Insurance On Corporate Performance

In the context of a highly competitive market and a complex global situation,corporate governance mechanism has gradually become a key factor in the longterm stable development of enterprises.Directors’ and officers’ liability insurance serves as a method of risk transfer.The inclusion of D&O liability insurance in corporate governance can promote risk avoidance and offer corporate management protection,which is helpful for enhancing corporate operating efficiency and attaining the long-term steady development of companies.Both local and foreign researchers have performed extensive research at the theoretical level.On whether D&O liability insurance can enhance organizational performance,there is no common understanding.The majority of academics think that getting D&O liability insurance will help the business succeed.D&O liability insurance,on the one hand,can transfer the risk of management responsibility,encouraging management to pursue the maximization of shareholders’ interests;on the other hand,the insurance institutions play the role of external supervision and have a significant impact on corporate performance.Yet,other academics contend that the D&O liability insurance fosters opportunistic behavior,ups the likelihood of management failure,and prevents the development of corporate performance.In actuality,due to the absence of pertinent domestic rules and regulations,the development of the insurance in China is not hopeful.The risk associated with the performance of directors and executives is gradually rising as a result of the capital market’s ongoing development and the tightening of market regulation.Enterprises decide to get D&O liability insurance in order to shift these risks.Can D&O liability insurance have an impact on corporate performance? What path does it affect? These issues need further study.Therefore,based on insurance demand theory,principal-agent theory,equity balance theory,enterprise innovation theory and information asymmetry theory,this paper deeply studies the theoretical basis of D&O liability insurance and corporate performance.Based on the case of Luckin Coffee,the consequences of D&O liability insurance on corporate performance is discussed in this study from the angles of agency cost and enterprise innovation.In order to conduct an empirical analysis,this study selects necessary information from Shanghai and Shenzhen Ashare listed companies for the period of 2008 to 2021.Based on theoretical analysis and transmission mechanism analysis,this paper gathers data on various factors,conducts empirical research on the effects of D&O liability insurance on corporate performance,agency costs and enterprise innovation,and the intermediary relationship between D&O liability insurance,agency costs,and enterprise innovation and corporate performance,and analyzes the heterogeneity of whether the listed company is CEO duality and whether it is profitable,and is robustness tested.The conclusions are as follows:(1)Corporate performance benefits from D&O liability insurance.D&O liability insurance promotes directors and executives to actively perform their duties and pursue the maximization of shareholders’ interests;insurance companies involved in the supervision of duty,reduce the cost of personal supervision of shareholders.They can considerably raise business performance levels.The positive relationship between the two is mainly reflected in the two-duty separation and profitable listed companies.(2)The two types of agency costs play a mediating role between D&O liability insurance and corporate performance.D&O liability insurance significantly improves corporate performance by reducing the agency cost of listed companies.D&O liability insurance’s incentive effect and supervision effect urge the management to pursue the maximization of shareholders’ wealth,supervise the encroachment of major shareholders’ interests,and significantly reduce the two types of agency cost.And it can enhance business efficiency and improve corporate performance.(3)Enterprise innovation plays a mediating role between D&O liability insurance and corporate performance.D&O liability insurance plays a role in risk diversification and improves the level of corporate risk-taking by providing litigation compensation for enterprises and directors’ and officers’ executives.At the same time,the resulting risk assessment services from insurance companies improve the efficiency of corporate risk management,provide a strong development space for corporate innovation activities,and then promote the improvement of corporate performance.(4)The incentive effect,supervisory impact,and signal transmission effect all contribute to how D&O liability insurance,agency costs,enterprise innovation,and corporate performance are transmitted.The coexistence of incentive and supervision of D&O liability insurance improves the risk-taking level of management.Shareholders and management pay more attention to the business performance of enterprises,actively carry out enterprise innovation,and the purchase of D&O liability insurance also passes good signals and comprehensively improves company performance.Based on the research conclusions,this essay offers solutions and advice from the standpoint of creating D&O liability insurance terms,innovating and developing D&O liability insurance products,improving the company’s internal control system and information disclosure mechanism,and creating relevant laws and regulations in line with China’s national conditions,so as to improve the application of D&O liability insurance in the domestic market,deepen the industry ’s awareness of the insurance,and stimulate its positive impact on corporate governance.The following elements demonstrate how this paper is innovative.Firstly,from the perspective of D&O liability insurance engaging in corporate governance,it addresses the effect of D&O liability insurance.Secondly,it also discusses the internal transmission mechanism from the perspective of agency cost and enterprise innovation.Thirdly,this paper also makes an effort to investigate the effects of CEO duality and whether or not the company is profitable on the relationship between D&O liability insurance and corporate performance,which broadens the scope of research on the variations in this relationship and offers additional resources for enhancing corporate performance.