Exploring the Impact of Directors' and Officers' Liability Insurance on Firm Innovation: A Governance Perspective
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This study examines the relationship between Directors' and Officers' (D&O) liability insurance and firm innovation within the context of Chinese A-shares traded on the Shanghai and Shenzhen stock exchanges. Utilizing data manually collected on D&O insurance, stock returns from the Wind database, and financial metrics from the China Stock Market and Accounting Research (CSMAR) database, we investigate whether D&O insurance influences corporate innovation. Our analysis spans the period from 2010 to 2022, encompassing 3,440 listed companies and 35,228 firm-year observations. The empirical results indicate that firms with D&O insurance exhibit higher levels of innovation, measured by increased patent citations and the number of high-impact patents. Additionally, we find that the positive effect of D&O insurance is more pronounced when firms maintain high levels of financial transparency. The interaction between D&O insurance and financial transparency creates a favorable environment for both quantity and quality of innovation. The Heckman two-step sample selection model is employed to address potential endogeneity concerns, and the results remain robust after this correction. Furthermore, an event study reveals significant positive market reactions to the announcements of D&O insurance purchases, with cumulative abnormal returns (CAR) increasing in response to these announcements. These findings underscore the importance of D&O insurance not only in protecting corporate leaders but also in fostering an environment conducive to innovation. They highlight the broader implications of D&O insurance for corporate governance, suggesting that it can play a key role in aligning managerial incentives with long-term innovative goals.
Abstract
This study examines the relationship between Directors' and Officers' (D&O) liability insurance and firm innovation within the context of Chinese A-shares traded on the Shanghai and Shenzhen stock exchanges. Utilizing data manually collected on D&O insurance, stock returns from the Wind database, and financial metrics from the China Stock Market and Accounting Research (CSMAR) database, we investigate whether D&O insurance influences corporate innovation. Our analysis spans the period from 2010 to 2022, encompassing 3,440 listed companies and 35,228 firm-year observations. The empirical results indicate that firms with D&O insurance exhibit higher levels of innovation, measured by increased patent citations and the number of high-impact patents. Additionally, we find that the positive effect of D&O insurance is more pronounced when firms maintain high levels of financial transparency. The interaction between D&O insurance and financial transparency creates a favorable environment for both quantity and quality of innovation. The Heckman two-step sample selection model is employed to address potential endogeneity concerns, and the results remain robust after this correction. Furthermore, an event study reveals significant positive market reactions to the announcements of D&O insurance purchases, with cumulative abnormal returns (CAR) increasing in response to these announcements. These findings underscore the importance of D&O insurance not only in protecting corporate leaders but also in fostering an environment conducive to innovation. They highlight the broader implications of D&O insurance for corporate governance, suggesting that it can play a key role in aligning managerial incentives with long-term innovative goals.
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