Does non-punitive regulation increase the demand for D&O insurance?

Abstract

As a pivotal element in the evolution of government regulation, the economic consequences of inquiry letters have received significant attention from policymakers and academics. This study examines the impact of inquiry letters issued by stock exchanges on the demand for corporate directors' and officers' liability insurance (D&O insurance). Our findings indicate a significant positive relationship between inquiry letters and future D&O insurance demand, with main conclusions remaining robust across various robustness tests such as difference-in-differences estimation, propensity score matching, and instrumental variables. In addition, both regulatory inquiry pressure and corporate attention significantly increase D&O insurance demand, with notable variations across inquiry types. Channel tests show that inquiry letters function as effective risk warning signals, alerting companies to litigation, governance, and reputation risks. Further analysis reveals that corporate governance mechanisms and political connections dampen the facilitating effect of inquiry letters on firms' D&O insurance demand. Our study provides valuable practical insights for policymakers and corporate managers in emerging markets based on a non-punitive regulation perspective.