Faithful or fearless: directors’ and officers’ liability insurance and management discussion and analysis tone manipulation

We examine whether directors' and officers' liability insurance (D&O insurance) influences managers' strategic tone manipulation of management discussion and analysis. We find that D&O insurance is positively associated with upward tone manipulation. This association is more pronounced for firms with greater litigation risk or highly-motivated and overconfident managers. Additionally, we document more favorable short-term returns and intensive reversals responding to positive tones issued by D&O insurance-covered firms. Besides, D&O insurance-shielded managers may inflate the tone by reducing risk-factor information disclosures. Overall, our results support that D&O insurance can trigger managers' unethical manipulations by reducing their expected personal legal liability.