The dark side of mitigating risk: directors' and officers' liability insurance and unethical business behavior

Purpose The purpose of this paper is to investigate the ethical implications of D&O liability insurance on the voting behavior of minority shareholders in China's A-share listed firms. This paper examines how D&O insurance, intended as a risk mitigation tool, may inadvertently foster unethical behavior, such as collusion between executives and large shareholders. Design/methodology/approach The research explores the impact of D&O liability insurance on minority shareholder voting behavior in China's A-share companies through multiple regression analysis. Addressing endogeneity issues with PSM, 2SLS and the Heckman two-stage model. Mechanism analysis showed that D&O insurance might increase active voting by minority shareholders by enhancing executives' benefits, facilitating major shareholders' tunneling and influencing dividend policies. Heterogeneity analysis is based on the nature of corporate ownership and the degree of information asymmetry. Finally, this paper discussed the impact of D&O insurance on the company's economic consequences. Findings The findings reveal that D&O insurance increases minority shareholders' voting rates as a response to governance lapses. This paper highlights the nuanced positive effects of minority shareholder activism in countering the negative impacts of D&O insurance, emphasizing their critical role in maintaining ethical corporate governance. Originality/value This paper makes a significant contribution to the literature by underscoring the pivotal role of minority shareholders in fostering ethical corporate governance. It provides valuable insights for policymakers aiming to enhance minority shareholder rights and improve firm performance.