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Directors' and officers' liability insurance and digital transformation – the mediating role of explorative innovation

Jing Huang, Zixi Ling, Ren Lu

Business Process Management Journal

ISSN: 1463-7154

Article publication date: 23 December 2022

Issue publication date: 13 January 2023

770

Abstract

Purpose

The purpose of this paper is to investigate the relations between the directors' and officers' (D&O) insurance and digital transformation of Chinese-listed companies to provide insights into triggers of digital transformation from the perspective of D&Os' incentive plan.

Design/methodology/approach

Based on a panel dataset of 2,590 listed manufacturing companies in China from 2017 to 2020, and using a textual analysis of annual reports, this paper empirically examines the impact of D&O insurance on digital transformation. The authors investigate the mechanism through a mediating model and apply a series of robustness tests including firm fixed effect model, propensity score matching and changing key measures.

Findings

The research shows that the digital transformation has been negatively influenced by D&O insurance. The long coverage duration of D&O insurance significantly lowers the level of digital transformation. The moral hazard problem caused by D&O insurance has hampered digital transformation through reducing explorative innovation, while there has been no significant change in innovation quantity. Under the coverage of D&O insurance, firms with worse internal governance and state-owned firms are more reluctant to invest in risky transformation than their counterparts.

Originality/value

Based on a textual analysis of annual reports, this paper empirically tests the influential mechanism of D&O insurance coverage on digital transformation. The authors provide insights into non-tech triggers of digital transformation and uncover how incentive plans influences D&Os' behaviors. This paper provides a new angle to the debate on governance-strengthening and governance-weakening role of D&O insurance.

Keywords

Citation

Huang, J., Ling, Z. and Lu, R. (2023), "Directors' and officers' liability insurance and digital transformation – the mediating role of explorative innovation", Business Process Management Journal, Vol. 29 No. 1, pp. 178-201. https://doi.org/10.1108/BPMJ-08-2022-0419

Publisher

:

Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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