Directors’ and officers’ liability insurance and corporate cash holdings: From principal–principal perspective

This study examines the effect of directors’ and officers’ liability insurance (D&O insurance) on corporate cash holdings in China. We propose a collusion theory in which D&O insurance can exacerbate the conflicts of interest between controlling and minority shareholders by shielding directo...

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Bibliographic Details
Published inJournal of business finance & accounting Vol. 51; no. 5-6; pp. 1432 - 1466
Main Authors Liang, Quanxi, Gao, Wenlian, Yan, Lijuan
Format Journal Article
LanguageEnglish
Published Oxford Blackwell Publishing Ltd 01.05.2024
Subjects
agency costs
cash holdings
Companies
Conflicts of interest
directors’ and officers’ liability insurance
Discounts
Insurance
Liability
Litigation
litigation risk
Stockholders
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Summary:This study examines the effect of directors’ and officers’ liability insurance (D&O insurance) on corporate cash holdings in China. We propose a collusion theory in which D&O insurance can exacerbate the conflicts of interest between controlling and minority shareholders by shielding directors and officers from shareholder litigation in emerging countries. Consistent with our expectation, we find that insured firms tend to have high cash holdings that are appropriated by both controlling shareholders and directors/officers rather than being invested or paid to shareholders. Moreover, the positive relationship between D&O insurance and cash holdings is more pronounced in firms with high litigation risks, whereas the effect is attenuated in firms with political connections, strong external monitoring mechanisms and strong controlling shareholder power. Compared with uninsured firms, the market discounts the value of cash holdings for insured firms.
ISSN:0306-686X
1468-5957
DOI:10.1111/jbfa.12752