Investigating the association between the amount of directors’ and officers’ liability insurance and accounting earnings quality
Date Issued
2011
Date
2011
Author(s)
Wen, Che-Chia
Abstract
This study examines the association between the amount of directors’ and officers’ liability insurance and accounting earnings quality, exploring whether the directors’ and officers’ liability insurance will create moral hazard. In this study, we use discretionary accruals as benchmarks. The regression analysis and t-tests are used to estimate the normal level of directors’ and officers’ liability insurance and check the association of directors’ and officers’ liability insurance with other variables.
This study adds to the literature in that (1) it proposes and estimates the model for normal amount of insurance and thus identifies the firms that are better covered, (2) it explores the association between discretionary accruals and the amount of excess directors’ and officers’ liability insurance, and (3) it confers the association between discretionary accruals and the market values, with which it facilitates the functional complementation of corporate governance between enterprise market value and the directors’ and officers’ liability insurance.
Empirical results are consistent with the notion that excess directors’ and officers’ insurance induces the directors’ and officers’ moral hazard in monitoring the quality of corporate financial statements. First, market value and debt ratio are the variables to the amount of directors’ and officers’ liability insurance. In contrast, the explanatory power of standard deviation of daily return is insignificant. Second, market value, excess amount of insurance and previous-year discretionary accruals help explain the variation of discretionary accruals. Specifically, discretionary accrual decreases with market value but increases with excess amount of insurance. Third, the firms with greater excess directors’ and officers’ liability insurance are with low accounting earnings quality.
Subjects
directors’ and officers’ liability insurance
discretionary accruals
moral hazard
Type
thesis
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ntu-100-R97724007-1.pdf
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