Directors' & Officers' liability insurance and financing decisions: Evidence from debt structure choice

• Published in: Pacific-Basin finance journal 2024-02, Vol.83, p.102248, Article 102248
• Main Authors: Li, WeiWei, Padmanabhan, Prasad, Huang, Chia-Hsing
• Format: Article
• Language: English
• Subjects: Debt structure; Directors' and officers' liability insurance
• ISSN: 0927-538X; 1879-0585
• DOI: 10.1016/j.pacfin.2023.102248

Using annual data for a group of Chinese listed firms over the 2010–2020 period, we investigate whether the purchase of Directors' and Officers' liability insurance alters the debt structure of Chinese firms, ceteris paribus. Using the two-stage least squares methodology, we find that such purchase persuades firm management to increase its long-term debt ratio, after controlling for several other factors that can influence this ratio. Several robustness tests reaffirm these findings. These results favor the monitoring effect theory over the moral hazard theory. The research results also show a significant negative correlation between the purchase of D&O Insurance and the cost of debt. The findings of this paper affirm the positive impact of buying D&O insurance on a listed firm's debt structure. •D&O insurance is significantly positively associated with long-term debt.•The findings provide support for the monitoring effect theory and against the moral hazard theory.•The magnitude of the positive relationship is more pronounced for firms with higher levels of default risk and for firms in financial distress. Firms with long duration insurance coverage also tend to hold higher levels of long-term debt (Online Appendix).