Directors' liability insurance and investment-cash flow sensitivity

摘要

We examine the association between directors' liability insurance and investment-cash flow sensitivity with listed firms in Taiwan. We find that directors' liability insurance increases the investment-cash flow sensitivity. Specifically, insured firms are more likely to have excessive investment than uninsured firms given the same level of cash flow. This is the result of managerial opportunistic behaviors fueled by moral hazard inherent in directors' liability insurance. Although managerial opportunism could certainly increase the likelihood of corporate wrongdoing, our results show that it could be mitigated by having improved regulation or corporate governance.