Chief Executive Officer Incentives, Monitoring, and Corporate Risk Management: Evidence from Insurance Use

Abstract

Corporate governance and risk management issues have received prominent publicity in recent years following several major company failures such as Bear Stearns and Lehman Brothers. While prior studies have examined this issue within the context of derivatives’ trading, little is known regarding the linkage between corporate governance and alternative corporate risk management activities such as insurance. Using a detailed firm survey conducted by the World Bank (2004), we examine the impacts of various governance monitoring mechanisms and CEO characteristics on the corporate insurance decision. Overall, our results suggest that both monitoring mechanisms and managerial incentives induce the corporate purchase of property insurance. However, the purchase of property insurance for managerial self-interest is only prevalent in firms subject to lax monitoring and the determinants of insurance purchases are more in line with the prediction of the economic theory in firms with strong monitoring. In addition, our study contributes a number of new insights into the determinants of corporate purchase of property insurance.

Keywords: Corporate Risk Management, Insurance, Corporate Governance, Managerial Incentives, Monitoring, China

JEL Classification: G22, G30, G32