Abstract
This study examines the role of increased short selling threats in firms’ directors and officers liability insurance (D&O insurance) purchase decision against the backdrop of the Chinese deregulation of short sale. Using a difference-in-differences (DiD) research design, we demonstrate a positive effect of short selling threats on firms’ likelihood of purchasing D&O insurance policies after controlling for the known determinants of D&O insurance. We then perform tests to validate the DiD analysis result, including a test of the parallel trend assumption and placebo tests. To shed light on the mechanism through which the effect of short selling takes place, we perform a path analysis. The results reveal that firms’ litigation risk explains the effect of short selling pressure on D&O insurance purchase decision. Further cross-sectional analyses show that the positive effect of short selling threats on D&O insurance is ameliorated when firms have strong internal control or have great analyst coverage.
| Original language | English |
|---|---|
| Pages (from-to) | 111-133 |
| Number of pages | 23 |
| Journal | European Journal of Finance |
| Volume | 29 |
| Issue number | 1 |
| Early online date | 16 Dec 2022 |
| DOIs | |
| Publication status | Published - 2 Jan 2023 |
Keywords
- analyst coverage
- directors’ and officers’ liability insurance
- internal control
- Short selling deregulation
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