Does directors’ and officers’ liability insurance enhance corporate tax compliance? Evidence from Chinese a-share listed companies

Directors’ and Officers’ (D&O) liability insurance is a key component of modern corporate governance, and assessing its impact is crucial to enhancing corporate governance. This study uses data from Chinese A-share listed companies to examine how corporate D&O liability insurance affects tax compliance. The findings show that purchasing D&O insurance significantly increases corporate tax avoidance. Mechanism tests show that D&O insurance provides an effective risk-sharing mechanism for senior executives, which increases their risk appetite and reduces their management intensity, thus increasing tax noncompliance. Heterogeneity analysis shows that the impact of D&O insurance on tax avoidance is significant in firms with stronger internal audits and external financial supervision but insignificant in firms with weaker internal and external oversight. These findings provides insights into improving the D&O insurance system and reducing corporate tax non-compliance. This study indicates that while developing the D&O liability system, we must also consider its potential negative impacts on corporate governance.