Directors and officers liability insurance and maturity mismatch: evidence from China

Abstract

We investigate the impact of the purchase of Directors’ and Officers’ liability insurance (D&O insurance) on a firm’s risk-taking behaviour in China, measured by the firm’s maturity mismatch ratio. Using a unique manually collected dataset, we find a significant positive relationship between a firm’s purchase of D&O insurance and the firm’s maturity mismatch ratio, which supports the moral hazard theory. The mechanisms of our main finding are corresponding internal and external monitoring, in which the main finding is only significant for firms under weak monitoring. Our result remains significant after employing several approaches to alleviate potential endogeneity concerns, including an alternative sample and the sensitivity test model. Our paper sheds some extra light on the issue related to D&O insurance in a country with inadequate internal supervision and weak investor protection and the determinant of a firm’s maturity mismatch ratio.