Does directors' and officers' liability insurance improve corporate ESG performance? Evidence from China

We examine the causal effect of directors' and officers' liability insurance (D&O insurance) on environmental, social and governance (ESG) performance in China's listed firms. Using a unique data set on D&O insurance purchases in China, we document a positive relationship between D&O insurance and ESG performance, which is robust to a comprehensive battery of robustness checks including Heckman two-step sample selection model, propensity score matching (PSM) model, instrumental variable approach, and fixed effects model. Further analyses suggest that the positive association is more salient for state-owned enterprises (SOEs). Moreover, the path analysis provides evidence for the mediating effect of non-financial information disclosure and corporate governance quality on the relationship between D&O insurance and ESG performance. Collectively, this study contributes to the literature on the economic benefit of D&O insurance by providing initial evidence that D&O insurance appears to enhance corporate governance and improve corporate ESG performance.