Directors' and officers' liability insurance and stock price crash risk |
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| Affiliation: | 1. School of Business, Renmin University of China, China;2. School of Accountancy, Central University of Finance and Economics, China;3. Business School, Hunan University, No. 109 Shijiachong Road, Yuelu District, Changsha, Hunan 410006, China;1. School of Accounting and Finance, University of Waterloo, 200 University Avenue West, Waterloo, ON, N2L 3G1, Canada;2. John Molson School of Business, Concordia University, 1450 Rue Guy, Montréal, QC H3H 0A1, Canada;1. School of Accountancy, Central University of Finance and Economics, 39 South College Road, Haidian District, Beijing, 100081, China;2. Gabelli School of Business, Fordham University, 113 West 60th Street, New York, NY, 10023, United States;1. Marist College, School of Management, Poughkeepsie, New York 12601, United States;2. Tunghai University, Department of Finance, Taichung, Taiwan 40704;1. Department of Insurance and Financial Management, Takming University of Science and Technology, Taiwan;2. Department of Finance, Insurance and Law, Illinois State University, Normal, IL, United States;3. Department of Finance, The Chinese University of Hong Kong, Hong Kong;1. School of Business, Renmin University of China, Beijing 100872, China;2. School of Public Finance, Central University of Finance and Economics, Beijing 100081, China;3. Department of Accounting, University of Melbourne, Melbourne, VIC 3010, Australia;4. Gordon Ford College of Business, Western Kentucky University, Bowling Green, KY 42101, Kentucky, United States |
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| Abstract: | We investigate the impact of directors' and officers' insurance (D&O insurance) on stock price crash risk. We find that D&O insurance in China is negatively associated with stock price crash risk. This association is robust to a series of robustness checks including the use of alternative sample, Heckman two-step sample selection model, propensity score matching procedure, fixed effects model, the inclusion of some possibly omitted variables, and bootstrap method. Further analyses show that the impact of D&O insurance on crash risk is more pronounced in firms with lower board independence, non-Big 4 auditors, lower institutional shareholdings, and weaker investor protection; and the negative relationship between D&O insurance and crash risk is not driven by the eyeball effect. Moreover, we find that D&O insurance purchase is associated with less financial restatements and more disclosure of corporate social responsibility reports. Our findings provide support to the notion that D&O insurance appears to improve corporate governance. |
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