Does Size and Book-to-Market Contain Intangible Information about Managerial Incentives? Learning from Corporate D&O Insurance Purchase

Abstract

Using 2008–2018 data for all publicly-listed firms in Taiwan, this paper tests for asymmetric information in the Directors` and Officers` (D&O) liability insurance market. We argue that size and book-to-market ratio contain information such as managerial risk preferences and their intention to reduce litigation risk. Our results show that a negative relationship exists between litigation risk and insurance purchase among small and low book-to-market firms. Our findings pinpoint out the importance of using size and the book-to-market ratio when detecting asymmetric information in the corporate level.