Impact of D&O Insurance on Shareholder Wealth During Financial Restatement Announcements: An Empirical Study in Taiwan

Abstract This study investigates the influence of Directors’ and Officers’ Liability Insurance (D&O insurance) on shareholder wealth at the time of financial restatement announcements. Utilizing a dataset comprising 226 restatement announcements from firms listed on the Taiwan Stock Exchange (TWSE) and the Taipei Exchange (TPEx) spanning 2009 to 2021, our analysis demonstrates a statistically significant negative impact of D&O insurance coverage on shareholder wealth during these announcements. This supports the hypothesis that moral hazard-induced opportunism arises with D&O insurance coverage. Nevertheless, this detrimental effect is less significant in firms with strong other external monitoring mechanisms, such as active financial analyst coverage, substantial institutional investor ownership, and extensive media attention. These findings suggest that robust oversight can attenuate the potential negative repercussions associated with D&O insurance. Our research contributes to a deeper understanding of the role of D&O insurance within the framework of corporate information disclosure quality and its economic implications on financial restatements. JEL classification numbers: G14, G22, G34, M41. Keywords: Directors’ and Officers’ Liability Insurance, Financial Restatements, Corporate Governance, Moral Hazard, External Monitoring