China Journal of Accounting Research (Dec 2022)

The impact of D&O insurance on excess corporate leverage

  • Jiamin Liu,
  • Yalin Jiang,
  • Shengdao Gan,
  • Ran Chen

Journal volume & issue
Vol. 15, no. 4
p. 100271

Abstract

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The governance effects of directors’ and officers’ liability insurance (D&O insurance), an important tool for risk diversification, are of strong concern in the capital market. Using a sample of Chinese A-share listed firms from 2009 to 2018, we examine the impact of D&O insurance on excess corporate leverage. We find that D&O insurance is negatively associated with excess corporate leverage and that this result is consistent with a series of robustness tests. Further analyses show that D&O insurance impedes excess corporate leverage mainly because of its effect on external monitoring. The effect is more pronounced for firms that are state-owned, have political connections and are located in provinces with low marketization than for other firms.

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