Directors’ and Officers’ Liability Insurance and Tax Aggressiveness

Abstract

This paper examines the relationship between directors' and officers’ liability insurance (D&O insurance) and tax aggressiveness. Using large Canadian public companies listed on TSX300 and relying on several proxies for tax aggressiveness including GAAP and cash effective tax rates and the book-tax difference, I find that D&O insurance exhibits a strong negative relationship with the GAAP effective tax rates and a relatively moderate positive relationship with the book-tax difference, but there is no evidence that the D&O insurance is associated with the cash effective tax rates. I interpret these results as indicating that D&O insurance reduces the tax expenses reported in the financial statements but not the actual tax paid. In other words, the D&O liability insurance contributes to financial tax management but not to cash tax savings.