Controlling-Minority Shareholder Incentive Conflicts and Directors’ and Officers’ Liability Insurance: Evidence from China

30 Pages Posted: 3 Aug 2010

See all articles by Hong Zou

Hong Zou

The University of Hong Kong - Faculty of Business and Economics

Wong Sonia

Lingnan University - Department of Finance and Insurance; Lingnan University

Clement Shum

Lingnan University

Jun Xiong

Florida International University (FIU) - Department of Economics

Date Written: August 2, 2010

Abstract

This paper examines the demand for directors’ and officers’ liability insurance (D&O insurance) by Chinese listed companies where controlling-minority shareholder incentive conflicts are acute due to the concentrated and split ownership structure. We hypothesize and find evidence that the incidence of seeking D&O insurance is positively related to the extent of controlling-minority shareholder incentive conflicts – a finding not previously documented in the literature. Using an event study, we find that the announcements of D&O insurance decisions in firms that engage in earnings management, and/or are controlled by a local government (such firms tend to have stronger incentives to tunnel), seem to have a negative wealth effect. In addition, the incidence of the D&O insurance decision is positively related to the proportion of independent directors and several litigation risk proxies. Therefore, the breakthrough in corporate governance and judicial reforms has created non-negligible perceived securities litigation risk in China.

Suggested Citation

Zou, Hong and Sonia, Wong and Shum, Clement and Xiong, Jun, Controlling-Minority Shareholder Incentive Conflicts and Directors’ and Officers’ Liability Insurance: Evidence from China (August 2, 2010). Journal of Banking and Finance, Vol. 32, No. 12, 2008, Available at SSRN: https://ssrn.com/abstract=1652174

Hong Zou (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

China

Wong Sonia

Lingnan University - Department of Finance and Insurance ( email )

8 Castle Peak Rd
Tuen Mun
Hong Kong

Lingnan University ( email )

Castle Peak Road
Tuen Mun, New Territories
Hong Kong
China

Clement Shum

Lingnan University ( email )

135 Xingang Xi Road
Tuen Mun
Guangzhou, Guangzhou 510275
China

Jun Xiong

Florida International University (FIU) - Department of Economics ( email )

Miami, FL 33199
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
223
Abstract Views
1,858
Rank
248,431
PlumX Metrics