The Effect of Directors’ and Officers’ Liability Insurance on Firms’ Credit Ratings

This paper explores the effect of directors’ and officers’ liability insurance (D&O insurance hereafter) on the firms’ credit ratings, which serve as a proxy for firms’ credit risk perceived by the creditors. We construct a sample from the firms listed on both the Taiwan Stock Exchange (TWSE) an...

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Bibliographic Details
Published in:Tai Da Guan Li Lun Cong 2017-12, Vol.27 (4), p.75
Main Authors: Liao, Hsiu-Mei, Tang, Li-Fen, Jan-Zan, Lee, 廖秀梅, 湯麗芬, 李建然
Format: Article
Language:English
Subjects:
Credit ratings
Directors & officers insurance
Insurance coverage
Liability insurance
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Summary:This paper explores the effect of directors’ and officers’ liability insurance (D&O insurance hereafter) on the firms’ credit ratings, which serve as a proxy for firms’ credit risk perceived by the creditors. We construct a sample from the firms listed on both the Taiwan Stock Exchange (TWSE) and GreTai Securities Market (GTSM) from 2008 to 2011. The evidence shows that firms with D&O insurance have better credit ratings than those without D&O insurance. Further results show that D&O insurance coverage also impacts firms’ credit ratings. If the firm purchases the appropriate (normal) D&O insurance coverage that suits the firm’s specific characteristics and risk, it tends to have a superior credit rating. However, if the firm purchases excess (abnormal) D&O insurance coverage that is more than the firm’s needs, it tends to have an inferior credit rating, a fact that likely stems from opportunistic behaviors from the directors and managers at the expense of creditors.
ISSN:1018-1601
2410-2490
DOI:10.6226/NTUMR.2017.APR.A102-067