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

Abstract

Abstract 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.

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