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Independent Decision-Making or Going with the Flow? D&O Insurance and Investment Herding Behavior

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  • He, Chen
  • Peng, Bo
  • Dong, Yahao
  • Li, Yuhan
  • Deng, Bofu

Abstract

Imitation among peers is a prevalent behavior in the investment decision-making processes of firms. Directors and officers liability insurance (D&O insurance) transfers the risks associated with managerial decisions, potentially enhancing the effectiveness of their investments; however, it may also induce managerial negligence and herding behavior in investment. This study examines the impact of D&O insurance on managers' investment herding behavior, finding that the insurance significantly mitigates this tendency. A mechanistic analysis reveals that enhanced risk incentives, reduced agency costs, and increased public oversight are key factors to the positive influence of D&O insurance. Furtherly, we also find that purchasing D&O insurance helps mitigate the reduction in investment efficiency caused by herding behavior. These findings provide empirical evidence for firms to encourage managers to diminish herding effects in investments, optimize resource allocation, and maximize the advantages of liability insurance.

Suggested Citation

  • He, Chen & Peng, Bo & Dong, Yahao & Li, Yuhan & Deng, Bofu, 2025. "Independent Decision-Making or Going with the Flow? D&O Insurance and Investment Herding Behavior," Finance Research Letters, Elsevier, vol. 77(C).
    • Handle: RePEc:eee:finlet:v:77:y:2025:i:c:s1544612325003459
    DOI: 10.1016/j.frl.2025.107082
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