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 language | English |
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Pages (from-to) | 2636-2645 |
Number of pages | 10 |
Journal | Journal of Banking and Finance |
Volume | 32 |
Issue number | 12 |
DOIs | |
Publication status | Published - 1 Jan 2008 |
Bibliographical note
We thank the helpful suggestions of Professor Ike Mathur (Managing Editor), an anonymous referee, Xuanjuan Chen, Maurice Pendlebury, Donghui Wu, Tong Yu, Rongli Yuan, and participants at the 2006 Cardiff-Beijing University International Symposium on Chinese Accounting Research (UK). The authors appreciate the research assistance of Wei Cui, Wanbin Pan and Yong Yang. This paper was originally submitted to Professor Giorgio Szego on August 28, 2007 and was revised once prior to submission through the EES.Funding
Zou acknowledges the financial support of the Research and Postgraduate Studies Panel of Lingnan University (Grant No: DB05B1).
Keywords
- China
- D and O insurance
- Expropriation
- Private securities litigation
- Tunneling