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The Influence of Directors’ and Officers’ Insurance on Managerial Myopic Behavior

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  • Guang-Zheng Chen

Abstract

Literature on the effect of directors’ and officers’ insurance (D&O insurance) on managers’ decision-making supports the contention that D&O insurance encourages managers to engage in opportunistic behaviors that benefit themselves at the expense of shareholders. Managerial myopia is an essential agency issue. The literature suggests that myopic managers have incentives to reduce R&D spending to boost current earnings in order to increase their private benefits. This study examines whether D&O insurance induces myopic R&D cuts. Using a sample of Taiwanese listed firms, the results show that firms with higher levels of D&O insurance coverage are more likely to cut R&D expenditures to avoid earnings declines. This study provide insight into how the incentives arising from D&O insurance play an essential role in determining managerial myopic behavior.

Suggested Citation

  • Guang-Zheng Chen, 2016. "The Influence of Directors’ and Officers’ Insurance on Managerial Myopic Behavior," Asian Journal of Finance & Accounting, Macrothink Institute, vol. 8(2), pages 95112-95112, December.
    • Handle: RePEc:mth:ajfa88:v:8:y:2016:i:2:p:95112
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    References listed on IDEAS

    as
    1. Lin, Chen & Officer, Micah S. & Zou, Hong, 2011. "Directors' and officers' liability insurance and acquisition outcomes," Journal of Financial Economics, Elsevier, vol. 102(3), pages 507-525.
    2. Irene Kim, 2015. "Directors’ And Officers’ Insurance And Opportunism In Accounting Choice," Accounting & Taxation, The Institute for Business and Finance Research, vol. 7(1), pages 51-65.
    3. Beatriz Garcia Osma & Steven Young, 2009. "R&D Expenditure and Earnings Targets," European Accounting Review, Taylor & Francis Journals, vol. 18(1), pages 7-32.
    4. S. P. Kothari & Ted E. Laguerre & Andrew J. Leone, 2002. "Capitalization versus Expensing: Evidence on the Uncertainty of Future Earnings from Capital Expenditures versus R&D Outlays," Review of Accounting Studies, Springer, vol. 7(4), pages 355-382, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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