Effects of Directors’ and Officers’ Liability Insurance on Corporate Diversification

47 Pages Posted: 20 Aug 2013

See all articles by Hsin-Yi Chi

Hsin-Yi Chi

National Chung Hsing University - Department of Accounting

James Jianxin Gong

California State University at Fullerton

Tzu-Ching Weng

Feng Chia University

Guang-Zheng Chen

Feng Chia University

Date Written: August 20, 2013

Abstract

This study investigates how directors’ and officers’ liability insurance (hereafter D&O insurance) affects corporate diversification and post-diversification performance. Using a sample of 671 Taiwanese listed firms, we find that excessive D&O liability insurance is positively associated with corporate diversification, particularly unrelated diversification. In addition, we find that when diversification does occur, excessive D&O liability insurance worsens the shareholder value destroyed a firm’s diversification. These results are consistent with our hypothesis that excessive D&O liability insurance induces value-destroying empire building. Our results are robust to different model specifications and alternative measures of firm performance.

Keywords: D&O Liability Insurance, Agency Problem, Corporate Diversification, Firm Value

JEL Classification: G22, G32, G34, J44

Suggested Citation

Chi, Hsin-Yi and Gong, Jianxin and Weng, Tzu-Ching and Chen, Guang-Zheng, Effects of Directors’ and Officers’ Liability Insurance on Corporate Diversification (August 20, 2013). Available at SSRN: https://ssrn.com/abstract=2312952 or http://dx.doi.org/10.2139/ssrn.2312952

Hsin-Yi Chi

National Chung Hsing University - Department of Accounting ( email )

No. 250, Kuo Kuang Rd. Taichung city, Taiwan
Taichung, Taiwan, 402
Taiwan
886-422859730 (Phone)
886-422196131 (Fax)

Jianxin Gong (Contact Author)

California State University at Fullerton ( email )

Department of Accounting
Mihaylo College of Business and Economics
Fullerton, CA 92831
United States
(657)278-3897 (Phone)
(657)278-4518 (Fax)

Tzu-Ching Weng

Feng Chia University ( email )

100 Wenhwa Road
Talchung
Taiwan
886422335337 (Phone)

Guang-Zheng Chen

Feng Chia University ( email )

No. 100, Wenhwa Rd.
Taichung, 40724
Taiwan
886-4-24517250 (Phone)

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