The effect of directors’ and officers’ liability insurance on stock investors’ perceptions of earning quality
Authors: Hsiu-Mei Liao, Li-Fen Tang, Jan-Zan Lee
Journal: Chiao Da Management Review. Dec. 2015, 35(2): 113-148.
Directors and officers liability insurance; Earnings response coefficients; Endogenous binary treatment model
Using the earnings response coefficients (ERC hereafter) as a proxy for stock investors’ perceptions of
earnings quality, this study examines the effect of directors’ and officers’ liability insurance (D&O
insurance hereafter) on the ERC. Using publicly-available D&O insurance data for public firms in Taiwan from
2008 to 2010, we employ an endogenous binary treatment model and other methods to control self-selection bias
on the estimation of relationship between D&O insurance and ERC. The empirical results show that firms with D
&O insurance have lower ERC than those without D&O insurance. In addition, we find that firms with higher D&O
insurance coverage have lower ERC and firms with higher abnormal D&O insurance coverage will further
deteriorate the ERC. These results imply that stock investors believing the purchase of D&O insurance may
increase the risk of moral hazard from directors and officers, as it is not conducive to earnings quality,
andtheir earnings information on responses to stock prices will thereby be reduced.