Directors' and officers' liability insurance and firm innovation

In this paper, we investigate the impact of directors' and officers' insurance (D&O insurance) on firm innovation in China. We find that D&O insurance is significantly positively associated with firm innovation, which indicates that D&O insurance enhances managers' tolerance for failure. To address endogeneity concerns, we adopt the propensity score matching method and difference-in-differences approach. We find that firms with D&O insurance have a stronger risk bearing capacity. Further analyses show that the impact of D&O insurance on firm innovation is more pronounced in firms with a better legal environment, male executives, and stronger external supervision.