Effects of Directors’ and Officers’ Liability Insurance on Corporate Diversification
47 Pages Posted: 20 Aug 2013
Date Written: August 20, 2013
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
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