Pacific-Basin Finance Journal

The study investigates how CEO overconfidence impacts a firm's decisions on directors and officers (D&O) liability insurance over the 2008–2014 period for nonfinancial firms listed on the Taiwan Stock Exchange. We find that the effect of CEO overconfidence on the D&O insurance decision is significantly different between family and nonfamily controlled firms. Family firms with overconfident CEOs have higher demand for D&O insurance, particularly when the CEOs are family members. In contrast, nonfamily firms with overconfident CEOs tend to purchase less D&O insurance. These results are robust to the consideration of endogeneity concerns, and to alternative measures of family-controlled firms, CEO overconfidence, and D&O insurance coverage. This study provides the first empirical evidence regarding the role of managerial overconfidence in corporate D&O insurance decisions. • Whether a firm is family-owned plays a role in D&O purchase. • Family firms with overconfident CEOs have a larger D&O purchase than other firms. • Nonfamily firms show a negative relation between CEO's confidence and D&O purchase. • The negative relation between CEO confidence and D&O purchase is weaker for families.

Managerial overconfidence and directors' and officers' liability insurance