Does managerial entrenchment motivate the insurance decision?

This study examines whether the ‘managerial entrenchment’ problem resulting from the separation of ownership and control between the shareholders and managers of Chinese firms motivates the decision to purchase property insurance. Managerial entrenchment is measured using a principal component analysis (PCA)-derived index and our analysis is conducted using firm-level data from the Chinese corporate sector (World Bank, 2004). Overall, our results suggest that firms with a higher index score are more likely to insure their assets than other entities, no matter which definition we use for ‘managerial entrenchment’. However, the score for the index does not affect the amount of insurance coverage purchased. Moreover, agency costs do not appear to impact on the insurance decisions of Chinese firms suggesting that the corporate governance effectiveness of insurance contracts and the external monitoring capability of insurance companies could be muted. This could have important policymaking implications.