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Directors’ and officers’ liability insurance and accounting conservatism: empirical evidence from China

Author

Listed:
  • Wanjiao Jia
  • Shuoshuo Bi
  • Yingjie Du

Abstract

Purpose - This study analyses Chinese data to revisit the relationship between directors’ and officers’ (D&O) insurance and accounting conservatism, aiming to investigate the impact of investors’ legal protection on the function of D&O insurance. Design/methodology/approach - The study sample included all A-share firms listed on the Shanghai and Shenzhen Stock Exchanges from 2006 to 2019. Multiple regression was used to investigate the association between D&O insurance and accounting conservatism. The Heckman two-stage model and the propensity score matching method were used to check the robustness of the main results. Findings - D&O insured companies exhibited greater accounting conservatism. The higher the indemnity limit, the more conservative a firm’s earnings reporting. The positive correlation was stronger when investor protection was relatively weak. The impact of D&O insurance on accounting conservatism was stronger for companies with weaker internal or external supervision mechanisms. Originality/value - The study findings show that D&O insurance plays a positive role in the governance of listed companies when investors’ legal protection is weak, which supports the effective supervision hypothesis of D&O insurance.

Suggested Citation

  • Wanjiao Jia & Shuoshuo Bi & Yingjie Du, 2022. "Directors’ and officers’ liability insurance and accounting conservatism: empirical evidence from China," Managerial Auditing Journal, Emerald Group Publishing Limited, vol. 37(8), pages 1091-1112, August.
    • Handle: RePEc:eme:majpps:maj-10-2021-3353
    DOI: 10.1108/MAJ-10-2021-3353
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