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Confucianism and D&O insurance demand of Chinese listed companies

Author

Listed:
  • Kong, Xiaoran
  • Xu, Siping
  • Liu, Ming-Yu
  • Ho, Kung-Cheng

Abstract

This study explores the relationship between Confucianism and business ethics and explains the reasons for the low coverage of directors' and officers' (D&O) insurance in emerging markets from the perspective of informal institutions. Using a sample of Chinese listed companies that issued A-shares from 2004 to 2020 and the index of jinshi degree holder density as the proxy variable for Confucianism, we empirically tested the impact of Confucianism on corporate D&O insurance demand. Our results demonstrated that ethical values such as integrity, honesty, and wisdom in Confucianism restrain the D&O insurance market. This result is robust to instrumental variables, propensity score matching, the Heckman two-step regression, and other methods. Our mechanism analysis revealed that corporate risk-taking is an important channel through which Confucianism inhibits the D&O insurance demand of listed companies. Further analysis showed that the external regulatory, legal, and natural environments are important factors affecting the negative correlation between them. The influence of Confucianism on D&O insurance demand is more significant if the corporate executive team lacks foreign experience or exhibits high decision-making myopia. Confucianism has a more significant inhibitory effect on D&O insurance in state-owned enterprises, non-foreign holding companies, and firms with small holdings by institutional investors. Litigation risk significantly enhances the inhibitory effect of Confucianism on D&O insurance.

Suggested Citation

  • Kong, Xiaoran & Xu, Siping & Liu, Ming-Yu & Ho, Kung-Cheng, 2023. "Confucianism and D&O insurance demand of Chinese listed companies," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:pacfin:v:79:y:2023:i:c:s0927538x23000628
    DOI: 10.1016/j.pacfin.2023.101996
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    More about this item

    Keywords

    Confucianism; Moral hazard; Ethics; Directors and officers insurance;
    All these keywords.

    JEL classification:

    • D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Z12 - Other Special Topics - - Cultural Economics - - - Religion

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