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Directors and officers liability insurance and default risk

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  • Li-Su Huang

    (National Taichung University of Science and Technology)

Abstract

This paper investigates the effects of directors and officers (D&O) liability insurance on default risk. Using unique panel data of non-financial listed firms in Taiwan from 2010 to 2017, the empirical results indicate that D&O insurance exerts a significantly positive influence on firms' expected default frequency (EDF), controlling for the endogeneity of D&O insurance coverage and fixed effects. Further analyses reveal that such an effect exists particularly among firms with a high D&O insurance coverage ratio. Firms with D&O insurance have higher default risk than those without. Our findings differ from those in the existing literature by showing that D&O insurance coverage reflects firms' EDF and by capturing more insight on firms' EDF (market value, stock return volatility and firm asset volatility). The evidence indicates that D&O insurance may serve as a real-time, publicly observable signal of default risk for insurers and investors, enabling better contracting and risk management.

Suggested Citation

  • Li-Su Huang, 2022. "Directors and officers liability insurance and default risk," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 47(2), pages 375-408, April.
    • Handle: RePEc:pal:gpprii:v:47:y:2022:i:2:d:10.1057_s41288-020-00197-0
    DOI: 10.1057/s41288-020-00197-0
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    2. Wang, Man & Sun, Lujia, 2023. "Does Directors’ and Officers’ Liability Insurance improve corporate governance of Chinese listed firms? The moderating role of insider ownership," Finance Research Letters, Elsevier, vol. 51(C).

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