Interplay of Managerial Capability and Political Connections in Influencing Directors & Officers Liability Insurance Demand: Evidence from Chinese Listed Firms

This study investigates the influence of managerial ability on the demand for Directors and Officers (D&O) liability insurance, utilizing a comprehensive dataset of firms listed on the Shanghai and Shenzhen Stock Exchanges from 2008 to 2020. The analysis reveals that firms with higher managerial capability demonstrate a significantly increased demand for D&O insurance. This relationship underscores the proactive risk management strategies adopted by capable managers to safeguard corporate leaders against potential legal and financial liabilities. Furthermore, the study explores the moderating role of political connections in the relationship between managerial ability and D&O insurance demand. The results indicate that political connections amplify the positive effect of managerial ability on the demand for D&O insurance. Specifically, firms with strong political ties and high managerial capability are more inclined to invest in D&O insurance, highlighting the interplay between political influence and managerial decision-making. Overall, this research contributes to the literature by providing a nuanced understanding of how managerial ability and political connections interact to shape corporate risk management decisions, particularly in the context of D&O insurance procurement. The findings underscore the importance of considering firm-specific characteristics and institutional contexts in analyzing corporate governance and risk management practices.