D&O Insurance, Corporate Governance and Mandatory Disclosure: An Empirical Legal Study of Taiwan

The purpose of this paper is to test the signal effect of Directors and Officers (D&O) insurance and to analyze the necessity of mandatory disclosure of D&O insurance in Taiwan. D&O insurance is usually viewed as a signal mechanism of insured firms' corporate governance and thus its mandatory disclosure has been argued. However, there is no complete mandatory disclosure of D&O insurance in the United States and other countries. This issue is not only popular in common law worlds but also sprouting in civil caw jurisdictions such as Taiwan. In the first part of this research, the signal effect of D&O insurance in Taiwan will be empirically tested. The evidence suggests that the information about D&O insurance in Taiwan could statistically and significantly signal the qualities of corporate governance of insured firms. Then, this study addresses the mandatory disclosure of D&O insurance by comparative law and law & economic approaches. This paper compares the regulation about D&O insurance disclosure in the United States, Canada and Taiwan, and find out the reasons affecting the mandatory disclosure of D&O insurance. The Cost and benefit analysis is also applied to discuss whether or not the Canadian mandatory disclosed system should be transplanted. It concludes that the D&O insurance can signal the information of insured firms' corporate governance, and mandatory disclosure is required and justified. Such interdisciplinary research will provide through recommendations for the Taiwan and other emerging countries in Asia.