Article

China Accounting and Finance Review

, 17:7

First online:

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D&O Insurance and Corporate Investment Efficiency *

  • Xinyuan ChenAffiliated withResearch Institute of Accounting and Finance, Shanghai University of Finance and Economics
  • , Kai ZhuAffiliated withResearch Institute of Accounting and Finance, Shanghai University of Finance and Economics Email author 
  • , Nan LiAffiliated withResearch Institute of Accounting and Finance, Shanghai University of Finance and Economics

Abstract

This paper investigates the effect of directors and officers liability insurance (D&O insurance) on firm investment behaviour. Under the Chinese institutional environment, we analyse the relationship between D&O insurance and firms’ capital expenditure decisions. We find that compared with firms without D&O insurance, firms with D&O insurance will invest more with free cash flow and that their investment efficiency decreases. We get the same findings when we compare the investment behaviour of the same company between a period with D&O insurance and a period without D&O insurance. Our findings imply that improving the effect of D&O insurance on corporate governance should rely on the development of minority shareholder protection under the existing institutional environment.

Keywords:

D&O Insurance Overinvestment Investment Efficiency