Corporate governance and corporate social responsibility: Evidence from directors' and officers' liability insurance

Theoretical theories underpin the governance effect of directors' and officers' (D&O) liability insurance include agency costs and stakeholder interests. Motivated by mixed evidence on the corporate governance effects of D&O, we ask whether and how the directors' and officers' (D&O) liability insurance affects corporate social responsibility (CSR) performance in China, one of the largest and fastest growing economies in the world. We develop two contrasting hypotheses: (1) supervision and incentives versus (2) opportunism. To test these hypotheses, we rely on Chinese A-share market data and fixed effect panel regressions, along with a battery of robustness checks, including Heckman sample selection bias, two-stage least square instrumental variable (2SLS-IV), difference-in-difference (DiD), propensity score matching (PSM) analyses. Consistent with supervision and incentives hypotheses and stakeholder theory, we find that D&O liability insurance significantly increases firm's CSR performance and firms renewing D&O liability insurance with the same insurers tend to have better CSR performance. Two possible mechanisms supporting this positive relation between D&O liability insurance and CSR performance are information transparency and accounting conservatism. Aside from theoretical contributions, our findings offer important practical contributions such as promoting D&O as external governance and ensuring the functions of D&O insurance comprehensively and correctly understood. Integrating D&O insurance with CSR can be viewed as an important business strategy by mitigating risks, enhancing reputation, ensuring legal compliance, and supporting responsible decision-making.