Effects of Directors’ and Officers’ Liability Insurance on Corporate Diversification

Abstract

This study investigates how directors’ and officers’ liability insurance (hereafter D&O insurance) affects corporate diversification and post-diversification performance. Using a sample of 671 Taiwanese listed firms, we find that excessive D&O liability insurance is positively associated with corporate diversification, particularly unrelated diversification. In addition, we find that when diversification does occur, excessive D&O liability insurance worsens the shareholder value destroyed a firm’s diversification. These results are consistent with our hypothesis that excessive D&O liability insurance induces value-destroying empire building. Our results are robust to different model specifications and alternative measures of firm performance.