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

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.

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.

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.

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.