Journal of Applied Finance & Banking

Directors’ and Officers’ Liability Insurance, Directors’ and Managerial Overconfidence, and ESG Performance

• [ Download ]
• Times downloaded: 12

• Abstract

   

  This study investigates the effects of Directors’ and Officers’ Liability Insurance (D&O insurance) coverage and managerial and board overconfidence on firm’s Environmental, Social, and Governance (ESG) performance. Using a sample of 1,590 non-financial firms listed on the Taiwan Stock Exchange and the Taipei Exchange over the period 2015–2020, this study examines whether D&O insurance and behavioral traits of decision makers influence firms’ ESG outcomes. Prior literature suggests that D&O insurance mitigates expected litigation losses, facilitates executive retention, and enhances external monitoring, thereby strengthening corporate governance. However, D&O insurance may also induce moral hazard and speculative behavior. Moreover, while ESG engagement can function as a risk management mechanism, overconfident boards and managers tend to underestimate downside risks and expected losses, potentially reducing ESG investment. Based on correlation analyses and multivariate regression estimations, the empirical results indicate that higher levels of D&O insurance coverage are positively associated with ESG performance, whereas firms characterized by overconfident boards and management exhibit significantly poorer ESG performance.

   

  JEL classification numbers: G22, G40, M14, Q50, Q56.

  Keywords: D&O insurance, Overconfidence, ESG Performance.