95 /274
臺大管理論叢
第
27
卷第
4
期
95
The Effect of Directors’ and Officers’ Liability Insurance on Firms’
Credit Ratings
Summary
In recent years, the securities authority in Taiwan has been encouraging the firms listed
in the Taiwanese Stock Exchange (TWSE) and GreTai Securities Market (GTSM) to
purchase directors’ and officers’ liability insurance (D&O insurance hereafter). The
motivation of this recommendation is to protect the interests of outside investors. The
purchase of D&O insurance for directors and officers can compensate outside investors for
losses arising from the wrongdoings or negligence of directors or officers. However, D&O
insurance also transfers certain legal liabilities to the insurance company, which may
increase agency conflicts of debt and managerial opportunism (Moral Hazard); D&O
insurance thereby also increases the risk for outside investors.
Debt financing is a primary source of capital for business enterprises, and creditors are
also important outside investors. Designated agencies issue credit ratings, which are
determined by both the firm’s credit risk and its probability of default. Credit ratings can
impact the possibility of debt financing and the cost of debt. This fact has driven us to
explore the effect of D&O insurance on firms’ credit ratings, which serves as a proxy for
creditors’ perceptions of credit risk.
Prior studies on this subject are lacking. Although European and American countries
have implemented the D&O insurance system for many years, the information on D&O
insurance is not disclosed. The few D&O insurance studies are mostly concentrated on the
countries (e.g., Canada, UK), where D&O insurance information is disclosed upon request.
For example, some Canadian studies have explored the association between D&O insurance
and IPO (Initial Public Offering) prices, earnings conservatism and voluntary disclosure
(Chalmers et al., 2002; Chung and Wynn, 2008; Wynn, 2008). Their findings show that
although D&O insurance can lower the directors’ and officers’ legal liabilities, it may also
motivate directors and officers to engage in opportunistic earnings management. Thus, D&O
insurance may not be conducive to earnings quality and stock performance.
Hsiu-Mei Liao
, Associate Professor, Department of Accounting, Ming Chuan University
Li-Fen Tang
, Associate Professor, Department of Accounting Information, Chihlee University of
Technology
Jan-Zan Lee
, Professor, Department of Accountancy, National Taipei University