Directors’ and Officers’ Liability Insurance and Firm Performance: Evidence from Taiwan
https://doi.org/10.1515/apjri-2017-0025
Posted: 7 May 2014 Last revised: 22 May 2018
Date Written: May 19, 2018
Abstract
Using a sample of 5,752 Taiwanese firm-year observations over the 2008 to 2012 period, we examine whether and how the existence of D&O insurance may affect firm performance. Our results suggest that whether to purchase D&O insurance is an endogenous corporate behavior, D&O insurance is not significantly related to firm performance. In addition, we find that firms with higher cash ratio, larger and more independent board are more likely to purchase the D&O insurance, while older firms are less likely to buy the D&O insurance. Our study implies that the government should not require firms to buy the D&O insurance. Instead, government should allow firms themselves to decide whether they optimally should purchase D&O insurance or not based on each firm’s particular circumstances. Firms should also not just simply follow their peers to buy the D&O insurance. They should carefully compare the benefits and costs of the D&O insurance based on their own situations, and only buy the insurance when the benefits exceed the costs.
Keywords: D&O insurance; firm performance; Tobin’s Q; market to book ratio; corporate governance
JEL Classification: G30, G38
Suggested Citation: Suggested Citation