Directors and officers liability insurance and the wealth effect of M&A announcements

We explore the association between Directors and Officers Liability Insurance (D&O insurance) and the valuation of mergers and acquisitions (M&As) from the perspective of the monitoring hypothesis versus the moral hazard hypothesis. Examining a sample of 278 M&A announcements made by listed firms in Taiwan from 2009 to 2020, our study finds that high D&O-insured acquiring firms are associated with producing better benefits for shareholders through M&A channels than low-insured firms. Such a positive relationship is more evident for acquirers with higher agency problems, indicating that D&O insurance assists in weakening the conflict between managers and shareholders and serves as a viable substitute for traditional corporate governance, effectively taking on the role of an external monitoring channel. Further analyses reveal that D&O insurance is associated with improvement in the post-M&A operating performance. Overall, the evidence supports the monitoring hypothesis, implying that acquirers holding high-level D&O insurance are more likely to deter opportunistic managerial behaviours and enhance the corporate monitoring quality, thereby exerting a positive influence on valuation from M&A transactions.