This paper studies firm risk-taking strategies when the top management is covered by directors?? and officers?? (D&O) insurance. By way of 3SLS simultaneous equations models and eight risk-taking strategies, we test whether insured firms perform better risk-taking strategies. The findings show that D&O insurance has a positive impact on board independence. The empirical evidence also indicates that risk-taking strategies are significantly related to board independence and D&O insurance coverage. D&O insurance presents a substitution effect for board independence on risk-taking strategies. The firms with more independent directors perform better risk-taking strategies, which aligns with stakeholders?? interests and mitigate litigation risk, and thus demand less D&O insurance. Additionally, the influential power of the board independence and D&O insurance on risk-taking strategies may vary with the corporate ownership structure and macroeconomic environment.
Academy of Management Proceedings, 2016 (Meeting Abstract Supplement) 11378