Innovation cannot be achieved without external financial support. However, innovation activities are often trapped in the predicament of financing constraints and credit rent-seeking, which makes the innovation effect far deviate from the optimal value. External financing constraints and credit rent-seeking seriously hinder innovation input from both capital and motivation, resulting in obvious dual resource allocation problems of insufficient investment and financing difficulties in enterprise innovation. Information asymmetry and agency problems are the key factors that lead to external financing constraints and credit rent-seeking. Therefore, the fundamental way to solve the dual problems of financing constraints and credit rent-seeking is to reduce the information asymmetry and agency problems associated with the process of enterprise management. As an emerging external governance mechanism, D&O insurance aims to protect managers from personal liability in the event of litigation brought by shareholders or other stakeholders （such as creditors） alleging misconduct in the performance of their duties. Existing studies on the relationship between D&O insurance and enterprise innovation are mainly based on the managers’ income incentive and tolerance for innovation failure. Few studies pay attention to the impact of D&O insurance on the introduction of enterprise innovation funds from the perspective of external investors. Thus, in this paper, we attempt to fill this gap by exploring the impact of the relationship between D&O insurance, financing constraints and credit rent-seeking on enterprise innovation.
In the empirical section, we collect data on D&O insurance for Chinese public enterprises from the CNRDS database and other variables’ data are derived from the CSMAR database over the 2009-2019 period. Through empirical results, we find that D&O insurance can positively affect enterprise innovation, and it can promote enterprise innovation by reducing financing constraints and credit rent-seeking, which indicates that financing constraints and credit rent-seeking have a mediating effect. To address the possible endogeneity, we use the Heckman’s two-stage method, alternative explanatory variables and adding missing variables, and then perform additional tests to examine the underlying economic mechanism of our findings. We find that: （1） D&O insurance improves enterprises’ ability to obtain credit resources, which is embodied in the fact that banks actively provide more long-term loans to enterprises and reduce short-term loans, and the above relationship is more obvious in private enterprises. （2） D&O insurance improves the quality of information disclosure, further reduces the degree of information asymmetry and strengthens the internal supervision of enterprises, thus promoting enterprise innovation to a greater extent.
This paper makes the following contributions: First, it makes up for the lack of exploring the impact of D&O insurance on enterprise innovation investment from the perspective of external investors, verifying the point of “D&O insurance has the signal transfer function”, namely, by introducing the third supervision institution to improve the corporate governance effect, it can send positive signals to outside investors, thus improving the confidence of investors. Second, the theory of signal transmission is used to explain the influence mechanism of D&O insurance. The existing literature mainly uses the principal-agent theory to analyze the governance effect of D&O insurance on enterprise innovation. Third, through the two paths of financing constraints and credit rent-seeking, the influence mechanism of D&O insurance on enterprise innovation is deeply analyzed, which enriches the relevant researches in the field of financing constraints and credit rent-seeking.To some extent, this paper shows the governance effect of D&O insurance in Chinese enterprises, which is of great policy significance for promoting enterprise innovation and promoting D&O insurance in the Chinese insurance market.