Accounting Restatements and Managerial Legal Liability Coverage

Abstract This study investigates how managerial legal liability coverage, as measured by excessive managerial liability coverage, affect earnings restatements. Once managers mitigate their personal legal liability through managerial liability coverage, they may be more willing to misstate reported earnings. We test a sample of listed companies from Taiwan where D&O insurance are publicly available. We find that managers are more likely to misstate company's earnings when they are covered by relatively higher excess managerial liability coverage. Moreover, we find that excessive managerial liability coverage couldn’t mitigate management legal liability concerns about material misrepresentation (e.g., core earnings restatements). In addition, several additional analyses are conducted and the results are robust and remain unchanged.