The Influence of Directors’ and Officers’ Insurance on Managerial Myopic Behavior

Abstract

Literature on the effect of directors’ and officers’ insurance (D&O insurance) on managers’ decision-making supports the contention that D&O insurance encourages managers to engage in opportunistic behaviors that benefit themselves at the expense of shareholders. Managerial myopia is an essential agency issue. The literature suggests that myopic managers have incentives to reduce R&D spending to boost current earnings in order to increase their private benefits. This study examines whether D&O insurance induces myopic R&D cuts. Using a sample of Taiwanese listed firms, the results show that firms with higher levels of D&O insurance coverage are more likely to cut R&D expenditures to avoid earnings declines. This study provide insight into how the incentives arising from D&O insurance play an essential role in determining managerial myopic behavior.