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Why do firms purchase directors and officers liability insurance? – a perspective from short selling threats

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  • Haiyan Jiang
  • Kun Su

Abstract

This study examines the role of increased short selling threats in firms’ directors and officers liability insurance (D&O insurance) purchase decision against the backdrop of the Chinese deregulation of short sale. Using a difference-in-differences (DiD) research design, we demonstrate a positive effect of short selling threats on firms’ likelihood of purchasing D&O insurance policies after controlling for the known determinants of D&O insurance. We then perform tests to validate the DiD analysis result, including a test of the parallel trend assumption and placebo tests. To shed light on the mechanism through which the effect of short selling takes place, we perform a path analysis. The results reveal that firms’ litigation risk explains the effect of short selling pressure on D&O insurance purchase decision. Further cross-sectional analyses show that the positive effect of short selling threats on D&O insurance is ameliorated when firms have strong internal control or have great analyst coverage.

Suggested Citation

  • Haiyan Jiang & Kun Su, 2023. "Why do firms purchase directors and officers liability insurance? – a perspective from short selling threats," The European Journal of Finance, Taylor & Francis Journals, vol. 29(1), pages 111-133, January.
    • Handle: RePEc:taf:eurjfi:v:29:y:2023:i:1:p:111-133
    DOI: 10.1080/1351847X.2022.2146522
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