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Directors' and officers' liability insurance and stock price crash risk

Listed author(s):
  • Yuan, Rongli
  • Sun, Jian
  • Cao, Feng
Registered author(s):

    We investigate the impact of directors' and officers' insurance (D&O insurance) on stock price crash risk. We find that D&O insurance in China is negatively associated with stock price crash risk. This association is robust to a series of robustness checks including the use of alternative sample, Heckman two-step sample selection model, propensity score matching procedure, fixed effects model, the inclusion of some possibly omitted variables, and bootstrap method. Further analyses show that the impact of D&O insurance on crash risk is more pronounced in firms with lower board independence, non-Big 4 auditors, lower institutional shareholdings, and weaker investor protection; and the negative relationship between D&O insurance and crash risk is not driven by the eyeball effect. Moreover, we find that D&O insurance purchase is associated with less financial restatements and more disclosure of corporate social responsibility reports. Our findings provide support to the notion that D&O insurance appears to improve corporate governance.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0929119915001649
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    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 37 (2016)
    Issue (Month): C ()
    Pages: 173-192

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    Handle: RePEc:eee:corfin:v:37:y:2016:i:c:p:173-192
    DOI: 10.1016/j.jcorpfin.2015.12.015
    Contact details of provider: Web page: http://www.elsevier.com/locate/jcorpfin

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