Controlling-minority shareholder incentive conflicts and directors' and officers' liability insurance: evidence from China

Hong ZOU, Man Lai, Sonia WONG, Chun Yau, Clement SHUM, Jun XIONG, Jun YAN

Research output: Journal PublicationsJournal Article (refereed)

58 Citations (Scopus)

Abstract

This paper examines the demand for directors’ and officers’ liability insurance (DandO insurance) by Chinese listed companies where controlling-minority shareholder incentive conflicts are acute due to the concentrated and split ownership structure. We hypothesize and find evidence that the incidence of seeking DandO insurance is positively related to the extent of controlling-minority shareholder incentive conflicts – a finding not previously documented in the literature. Using an event study, we find that the announcements of DandO insurance decisions in firms that engage in earnings management, and/or are controlled by a local government (such firms tend to have stronger incentives to tunnel), seem to have a negative wealth effect. In addition, the incidence of the DandO insurance decision is positively related to the proportion of independent directors and several litigation risk proxies. Therefore, the breakthrough in corporate governance and judicial reforms has created non-negligible perceived securities litigation risk in China.
Original languageEnglish
Pages (from-to)2636-2645
Number of pages10
JournalJournal of Banking and Finance
Volume32
Issue number12
DOIs
Publication statusPublished - 1 Jan 2008

Fingerprint

Incentive conflict
Minority shareholders
Liability insurance
China
Litigation risk
Wealth effect
Listed companies
Incentives
Ownership structure
Announcement
Proportion
Earnings management
Corporate governance
Event study
Local government
Independent directors

Keywords

  • China
  • D and O insurance
  • Expropriation
  • Private securities litigation
  • Tunneling

Cite this

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title = "Controlling-minority shareholder incentive conflicts and directors' and officers' liability insurance: evidence from China",
abstract = "This paper examines the demand for directors’ and officers’ liability insurance (DandO insurance) by Chinese listed companies where controlling-minority shareholder incentive conflicts are acute due to the concentrated and split ownership structure. We hypothesize and find evidence that the incidence of seeking DandO insurance is positively related to the extent of controlling-minority shareholder incentive conflicts – a finding not previously documented in the literature. Using an event study, we find that the announcements of DandO insurance decisions in firms that engage in earnings management, and/or are controlled by a local government (such firms tend to have stronger incentives to tunnel), seem to have a negative wealth effect. In addition, the incidence of the DandO insurance decision is positively related to the proportion of independent directors and several litigation risk proxies. Therefore, the breakthrough in corporate governance and judicial reforms has created non-negligible perceived securities litigation risk in China.",
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Controlling-minority shareholder incentive conflicts and directors' and officers' liability insurance: evidence from China. / ZOU, Hong; WONG, Man Lai, Sonia; SHUM, Chun Yau, Clement; XIONG, Jun; YAN, Jun.

In: Journal of Banking and Finance, Vol. 32, No. 12, 01.01.2008, p. 2636-2645.

Research output: Journal PublicationsJournal Article (refereed)

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