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International Conference on Management Science and Engineering Management

ICMSEM 2020: Proceedings of the Fourteenth International Conference on Management Science and Engineering Management pp 420–435Cite as

Directors’ and Officers’ Liability Insurance and Overinvestment: Evidence from China

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Part of the book series: Advances in Intelligent Systems and Computing ((AISC,volume 1191))

Abstract

In recent years, with changing internal governance mechanisms and the improving external legal environment, the professional liability risks and legal constraints faced by directors and officers have become increasingly serious. Directors’ and Officers’ Liability Insurance (D&O insurance) is an important risk transfer mechanism that can transfer third-party litigation risk caused by goodwill management decisions and actions of executives. However, Chinese and overseas scholars have not yet reached a consensus on the corporate governance effect of D&O insurance, and form two main perspectives: opportunism hypothesis and supervision hypothesis. Using panel data from Shanghai-Shenzhen A-share manufacturing listed firms between 2010 and 2018, we test for a relation between D&O insurance and overinvestment, examining the impact of property right and equity ownership concentration on the relationship between the two. The results show that D&O insurance inhibits overinvestment behavior, which is more pronounced in state-owned firms or firms with low concentration of ownership. The paper explores the corporate governance effect of D&O insurance from the perspective of overinvestment, which significantly promotes the establishment of D&O insurance system and mitigates overinvestment problems. Further analyses provide theoretical guidance for accelerating reform in state-owned firms and optimizing ownership structure.

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Acknowledgements

We would like to thank scholars in the references for their contribution and support to this paper.

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Authors and Affiliations

  1. Business School, Sichuan University, Chengdu, 610064, People’s Republic of China

    Kun Li & Xiaoxiu Chen

Authors
  1. Kun Li
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  2. Xiaoxiu Chen
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Corresponding author

Correspondence to Xiaoxiu Chen .

Editor information

Editors and Affiliations

  1. Business School, Sichuan University, Chengdu, China

    Jiuping Xu

  2. Academy of Sciences of Moldova, Chisinau, Moldova

    Gheorghe Duca

  3. Faculty of Math and Science, Brock University, Hamilton, ON, Canada

    Syed Ejaz Ahmed

  4. ETSI Industriales de Ciudad Real, University of Castile-La Mancha (UCLM), Ciudad Real, Spain

    Fausto Pedro García Márquez

  5. Institute of Control Systems, Azerbaijan Natl Academy of Sciences, Baku, Azerbaijan

    Asaf Hajiyev

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Li, K., Chen, X. (2021). Directors’ and Officers’ Liability Insurance and Overinvestment: Evidence from China. In: Xu, J., Duca, G., Ahmed, S., García Márquez, F., Hajiyev, A. (eds) Proceedings of the Fourteenth International Conference on Management Science and Engineering Management. ICMSEM 2020. Advances in Intelligent Systems and Computing, vol 1191. Springer, Cham. https://doi.org/10.1007/978-3-030-49889-4_33

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