Directors' And Officers' Liability Insurance And Firm Innovation

Firm innovation is one of the important ways to build an innovative country.How to effectively enhance the innovation ability of the real economy is an issue that needs to be solved urgently.Since the 18 th National Congress of the Communist Party of China officially proposed the implementation of the innovation-driven development strategy,enterprises' innovation capabilities have been significantly improved.On July 24,2019,the Global Innovation Index Report 2019(GII)jointly released by the World Intellectual Property Organization(WIPO),Cornell University,and the European School of Business Administration showed that China ranks higher in innovation capabilities,ranking 14 th from 17 th place out of the 129 economies listed.Nevertheless,as a developing country,firm innovation is still mainly at the level of process innovation and product innovation,lacking functional innovation and chain innovation,and the quality innovation needs to be further improved.Therefore,how to further promote the quantity and quality of firm innovation is a key issue for China's economy entering the new normal stage.As a liability insurance,directors' and officers' liability insurance is funded by the company or jointly funded by the company and management purchasing for all directors,supervisors and executives,in order to protect them from the decisions and actions that may be made within their daily duties,which is also a novel risk transfer tool.However,the risk transfer mechanism of D&O liability insurance has demonstrated its feasibility as a corporate governance mechanism,it is difficult to conceal the fact that,compared with earlier and mature D&O liability insurance market of European and American countries(such as Canadian companies,the insurance coverage rate of which is about 86%,and the listed companies in the United States even have even reached 97%.)China's D&O liability insurance market started late and developed slowly.As of 2017,China's insurance rate is still less than 10%.This situation prompts us to think: What is the governance role of D&O liability insurance in China's capital market? What impact does it have on the level of corporate innovation? What is the mechanism behind it?In view of the above problems,this paper takes the data of China's A-share listed companies from 2007 to 2017 as a research sample to systematically examine the impact of D&O liability insurance on corporate innovation.Empirical research shows that purchasing D&O liability insurance can significantly promote corporate innovation.The reason lies in that,on the one hand,as a means of corporate risk transfer,D&O liability insurance shifts the liability risks it may face to insurance companies,providing “exemption clauses” for the management of the company,which relieves management's worries about career risks.It is helpful for adjusting the risk aversion characteristics of management and encouraging management to actively invest.On the other hand,by purchasing D&O liability insurance,management can spread the litigation risks faced by individuals into acceptable insurance costs,smooth the volatility of management performance returns,reduce the potential practice risks faced by management,and play the role of transferring risk and promoting active investment.By reversing the conservative investment tendency of the managers,the managers can eventually be encouraged to take the initiative to undertake investment projects with positive net income but higher risks,further improving the technological innovation level of the enterprise.Furthermore,this paper also delves into the role of D&O liability insurance purchases on firm innovation.The study finds that compared to companies that have not purchased D&O liability insurance,companies that have purchased often possess higher levels of risk commitment.And the higher ability to resist risks can impel companies to reach higher levels of firm innovation.This paper also considers the impact of corporate heterogeneity on the relationship between D&O liability insurance and firm innovation.The study reveals that the purchase of D&O liability insurance by state-owned listed companies,listed companies with low concentration of equity,and non-two-in-one listed companies has a more significant impact on firm innovation.The purchase of D&O liability insurance by listed companies in high-tech industries and high marketable regions has a more obvious role in promoting corporate innovation.In addition,this paper also finds that when the risk of external litigation environment a company facing is low,it is also easier to enhance the company's innovative behavior by purchasing D&O liability insurance.Finally,this paper also conducted a series of robustness tests,including: redefinition of corporate innovation variables;study of the time-lag effect of director liability insurance;propensity of score matching method;instrument variable method,etc.The results are consistent with the main empirical results of this article,verifying the accuracy of the research hypothesis.The research in this paper is helpful to test the promotion effect of D&O liability insurance on firm innovation and the mechanism behind it,and it has important policy significance to promote firm innovation ability.This paper studies the relationship between D&O liability insurance and firm innovation,which is divided into six parts.The first part is the introduction of the full text.This part elicits the research theme of the full text,analyzes the background and significance of the research on the relationship between D&O liability insurance and firm innovation,and also introduces the research method and main content of this article in detail.Besides,it illustrates the research ideas and framework of this paper by drawing flowcharts.The second part is a literature review.By sorting,analyzing and commenting on the relevant literatures of D&O liability insurance and firm innovation,the current situation and development trends of related issues are thoroughly understood,preparing for the next empirical research.The third part is a theoretical overview of the main body of this article.This section defines the concepts of D&O liability insurance and firm innovation,and then briefly reviews and introduces the development process of D&O liability insurance in China and the current market situation.Finally,the principal-agent theory,information asymmetry theory,and insurance theory are reviewed,explicating related theories of D&O liability insurance and firm innovation.The fourth part is theoretical analysis and research hypothesis.After sorting out the correlation between D&O liability insurance and firm innovation,this paper proposes a set of competitive assumptions.After that,the research samples used in this article and the sources of data are briefly presented.The explanatory variables,explained variables and control variables involved in the empirical part of this article are introduced in a more informative way.Finally,the models used in the empirical part are listed and a certain explanation attached.The fifth part is the analysis of empirical results,testing the impact of D&O liability insurance on the level of firm innovation,analyzing the role of D&O liability insurance on firm innovation,and further researching into how corporate heterogeneity affects the relationship between D&O liability insurance and firm innovation.At the same time,it examined whether the heterogeneity of the litigation environment in which the company is located affects the effect of the purchase of D&O liability insurance on the level of firm innovation,and conducted a robustness test.The last part is the research conclusion and policy recommendation.Research conclusions are obtained based on the results of theoretical analysis and empirical research,and related policy recommendations are given based on the conclusions.The main contributions of this paper: Firstly,this paper enriches the research results of the factors affecting the technological innovation of enterprises.From the perspective of D&O liability insurance participating in corporate governance,this article explores the impact of D&O liability insurance on corporate innovation,and further expands the relationship between corporate external governance mechanisms and corporate innovation.Secondly,it reveals the mechanism of D&O liability insurance to promote corporate innovation.Based on the research on the impact of D&O liability insurance purchase on corporate innovation,this article studies its mechanism from the perspective of corporate risk-taking,which enriches the corporate governance effect of D&O liability insurance.Thirdly,this article also examines the impact of corporate heterogeneity on the relationship between D&O liability insurance and corporate innovation.Relevant research is helpful to expand the difference between the relationship between D&O liability insurance and corporate innovation,so as to improve the company's innovative ability more specifically.