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Navigating legal responsibilities in politically connected firms: Insights into the influence of directors' and officers' insurance on litigation risk

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  • Xiaojuan Zhang
  • Yizhen Guo
  • Tiancheng Chi

Abstract

This study aims to investigate how directors' and officers' (D&O) liability insurance, legal responsibilities, and firm political connections collectively influence corporate litigation risk. D&O insurance is common, but its effectiveness in limiting litigation risk in diverse legal and political circumstances is questionable. The study employs a quantitative research approach, utilizing regression analysis and moderation techniques. Data are collected from a diverse sample of 411 individuals comprising directors, legal experts, government regulators, public company staff, and insurance providers. Regression models explore the relationships between D&O insurance, legal responsibilities, political connections, and corporate litigation risk. The findings provide practical insights for stakeholders in corporate governance, informing strategies to enhance risk management and compliance frameworks. This study contributes to the existing literature by empirically examining the comprehensive influence of D&O insurance, legal responsibilities, and political connections on corporate litigation risk. It integrates multiple variables and moderating effects to offer a nuanced understanding of corporate governance dynamics. Strategic adoption of D&O insurance can effectively mitigate litigation risks associated with legal responsibilities, although caution is warranted regarding the exacerbating effects of firm political connections. By understanding these dynamics, firms can proactively enhance their governance practices and adapt to regulatory changes, thereby improving overall corporate resilience and sustainability.

Suggested Citation

  • Xiaojuan Zhang & Yizhen Guo & Tiancheng Chi, 2025. "Navigating legal responsibilities in politically connected firms: Insights into the influence of directors' and officers' insurance on litigation risk," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 46(1), pages 545-559, January.
    • Handle: RePEc:wly:mgtdec:v:46:y:2025:i:1:p:545-559
    DOI: 10.1002/mde.4390
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