Directors' and Officers' Liability Insurance and Earnings Conservatism

Using C-Score, which is a firm-year measure of earnings conservatism developed by Khan and Watts (2009), this study examines the effect of directors' and officers' liability (D&O) insurance on earnings conservatism, and explores whether the increased litigation risk caused by firm's cross-country-listing would influence the relationship between D&O insurance and earnings conservatism. With a sample of years 2008 - 2010, the empirical result confirms a significantly positive relationship between D&O insurance and earnings conservatism. Furthermore, our findings suggest that the greater the D&O insurance coverage, the stronger the relationship between D&O insurance and earnings conservatism. Finally, we do not find any significant evidence that cross-country-listing helps strengthen the aforementioned relationship.