Invisible gatekeeper? Director & officer insurance in corporate governance: an empirical legal study of Taiwan

Chen, Chun-Yuan

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https://hdl.handle.net/2142/44767 Copy

Description

Title

Invisible gatekeeper? Director & officer insurance in corporate governance: an empirical legal study of Taiwan

Author(s)

Chen, Chun-Yuan

Issue Date

2013-05-28T19:19:05Z

Director of Research (if dissertation) or Advisor (if thesis)

Aviram, Amitai

Doctoral Committee Chair(s)

Aviram, Amitai

Committee Member(s)

• Garoupa, Nuno
• Lawless, Robert M.
• Ulen, Thomas S.

Department of Study

Law

Discipline

Law

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

J.S.D.

Degree Level

Dissertation

Keyword(s)

• Directors’ and officers’ insurance
• corporate governance

Abstract

After the problems experienced by Enron, WorldCom and other companies in various financial crises, the monitoring function of Directors’ and officers’ (D&O) insurance has been discussed more frequently. Given this tendency, discussions of this issue have become more popular in Taiwan. This research analyzes the role of D&O insurance in corporate governance in Taiwan. The monitoring hypothesis suggests that firms with weak corporate governance have a greater incentive to purchase D&O insurance. D&O insurance and other monitoring mechanisms are substitutes for each other. Firms which have better corporate governance have less demand for D&O insurance. Information about insured firms’ corporate governance can be conveyed by D&O insurance. In contrast, this study proposes an alternative hypothesis to the monitoring hypothesis. It argues that D&O insurance has a positive signal effect to the market. Accordingly, the signal effect is an important consideration in D&O insurance purchases. This research empirically analyzes the purchase of D&O insurance of around 4,000 listed firms in Taiwan from 2008 to 2010. A variety of econometric and statistical methods are applied. Empirical evidence shows that the monitoring function of D&O insurance is rejected and the signal effect of D&O insurance is supported. The positive signal effect of D&O insurance is a more important consideration than the monitoring function or indemnification for insured firms. This study also finds that there is no evidence supporting the existences of moral hazard and adverse selection. Thus, the findings regarding the rejection of the monitoring hypothesis and support for the signal hypothesis will not be affected. In conclusion, this dissertation analyzes the association among D&O insurance and corporate governance by comparative law and empirical methods. It concludes that the D&O insurance may signal the information of insured firms’ corporate governance, but the mandatory insurance rule is not recommended.

Graduation Semester

2013-05

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http://hdl.handle.net/2142/44767

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Copyright 2013 Chun-Yuan Chen

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