英文摘要 |
We examine the effect of directors’ and officers’ liability insurance (D&O insurance) on corporate diversification and subsequent firm performance. D&O insurance can encourage management to take risks and make less diversification, but it can also entrench management and lead to empire building. We test whether D&O insurance has a net positive effect on diversification. Using archival data from a sample of 685 Taiwanese companies that purchased D&O insurance between 2008 and 2011, we document that excessive D&O liability insurance is positively associated with corporate diversification, particularly unrelated diversification. In addition, we find that when diversification does occur, excessive D&O liability insurance worsens the shareholder value destroyed by corporate diversification. According to the agency theory, D&O insurance encourages risk taking and discourage corporate diversification. However, management entrenchment theory predicts that D&O insurance insulate managers from shareholder lawsuits and thus entrench them. Entrenched managers tend to pursue empire building activities like diversification. This study tests these two competing predictions. We find that evidence that is consistent with the management entrenchment hypothesis. That is, excessive D&O liability insurance induces empire building, especially unrelated diversification. Furthermore, the induced corporate diversification hurts shareholder value. Our results show that, in the Taiwan context, D&O insurance affects diversification and subsequent performance. Therefore, D&O insurance is a useful piece of information to shareholders when they make investment decisions. In addition, this study offers insights to policy makers who are interested in regulating D&O insurance and its related disclosure. Our results suggest a net negative effect of excessive D&O insurance on shareholder value. |