Controlling-minority shareholder incentive conflicts and directors’ and officers’ liability insurance: Evidence from China |
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Authors: | Hong Zou Sonia Wong Clement Shum Jun Xiong Jun Yan |
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Affiliation: | aDepartment of Economics and Finance, City University of Hong Kong, Hong Kong;bDepartment of Finance and Insurance, Lingnan University, Hong Kong;cSchool of Law, City University of Hong Kong, Hong Kong;dPing An Insurance, Shenzhen, Guangdong Province, China |
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Abstract: | This paper examines the demand for directors’ and officers’ liability insurance (D&O insurance) by Chinese listed companies where controlling-minority shareholder incentive conflicts are acute due to the concentrated and split ownership structure. We hypothesize and find evidence that the incidence of seeking D&O insurance is positively related to the extent of controlling-minority shareholder incentive conflicts – a finding not previously documented in the literature. Using an event study, we find that the announcements of D&O insurance decisions in firms that engage in earnings management, and/or are controlled by a local government (such firms tend to have stronger incentives to tunnel), seem to have a negative wealth effect. In addition, the incidence of the D&O insurance decision is positively related to the proportion of independent directors and several litigation risk proxies. Therefore, the breakthrough in corporate governance and judicial reforms has created non-negligible perceived securities litigation risks in China. |
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Keywords: | D& O insurance Private securities litigation Expropriation Tunneling China |
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