What Protects Me Also Makes Me Behave : The Role of Directors’ and Officers’ Liability Insurance on Empire-Building Managers in China

In this paper, we examine the monitoring effect of Directors’ and Officers’ liability insurance (D&O insurance) on firms’ acquisitions in China. We find that firms with managers covered by D&O insurance are less likely to undertake acquisitions and if they do, their acquisitions are associated with higher stock returns upon acquisition announcements and better operating performance post-acquisition. The deterrence of D&O insurance on acquisition is more pronounced when the insurance providers are more active and when managerial moral hazard is more likely to exist. Further findings suggest that D&O insurance diminishes the effect of CEO’s overconfidence and risk-seeking behaviors on their acquisition decisions. Overall, our study suggests that D&O insurance can play an effective monitoring role that deters empire-building acquisitions