Insurance Empowerment, Incentive Mechanisms, and Enterprise Digital Technology Innovation: Evidence from Directors' and Officers' Liability Insurance
FAN Hongli, ZHUO Zhi, MA Ruixin
School of Insurance, Shandong University of Finance and Economics; Institute of Chinese Financial Studies/Center of Chinese Insurance Studies, Southwestern University of Finance and Economics
Summary:
Report on the Work of the Government in 2025 places significant emphasis on technological and digital advancement. This prioritization occurs within a historical context defined by a deepening technological and industrial transformation. The digital technology innovation serves as a core role for change and updates at an unprecedented pace. Enterprises, in this framework, are the principal architects of digital technological progress. Consequently, a critical academic challenge is to investigate the constitutive factors within the “black box” of enterprise digital technology innovation and to systematically unravel its intrinsic driving mechanisms. Digital technology innovation, marked by high barriers, significant value density, and low substitutability, demands greater investments and bears higher risks and longer cycles than its traditional counterparts. These demands impose considerable decision-making risks on managers, potentially suppressing their innovation motivation and hindering related activities. Thus, cultivating managerial perseverance in innovation and bolstering their risk tolerance and resilience are important for enhancing corporate digital technology innovation capabilities. Finance plays a key role within the technological innovation However, little attention has been paid to whether finance can mitigate ex-ante managerial decision risks and alleviate managerial constraints in the digital innovation process. Directors' and Officers' (D&O) insurance serves as a risk-diversification tool, and encourages managers to pursue innovation through risk absorption and oversight. Given the high-risk nature of digital technology innovation, it remains unclear whether D&O insurance can effectively promote innovation of firms and support breakthrough advancements. Moreover, how insurance should empower enterprises in digital innovation remains an open question. To date, few studies have directly connected insurance with enterprise digital innovation, leaving theoretical propositions untested. Thus, this study examines the effect of insurance on digital technology innovation, and explores related channels. Using data from Chinese listed firms (2010-2023), this study employs textual analysis of public documents to identify digital technology innovation and precisely constructs a corresponding measurement metric. The results show that D&O insurance significantly promotes enterprise digital technology innovation. This finding remains robust after addressing endogeneity concerns, replacing indicator variables, and narrowing the research window. Mechanism analysis reveals that D&O insurance promotes enterprise digital technology innovation by mitigating managerial risk exposure, improving corporate governance, elevating investment and financing efficiency, and optimizing the human capital structure. FinTech services significantly strengthen the positive effect, while well-established intellectual property protection systems and digital infrastructure further create multiple overlapping reinforcement effects. Further extended analyses and heterogeneity tests deepen the understanding of how the insurance industry facilitates digital technology innovation. The promoting effect of D&O insurance on digital technology innovation is stronger among enterprises with longer duration and higher coverage of insurance. This pattern demonstrates significant time-accumulation and intensity-deepening effects. Moreover, the positive effect is further characterized by a “crossover effect”. Specifically, the D&O insurance encourages enterprises to pursue cross-border R&D patenting and guides non-digital firms toward digital transformation. Heterogeneity analysis shows that the positive effect of D&O insurance is more pronounced for high-tech, highly-competitive enterprises, as well as large-scale, state-owned, or technology-intensive enterprises. The positive effect is more significant for listed enterprises in northern regions, helping to narrow the overall “high in the south, low in the north” gap in the scale of digital technology innovation. These findings highlight the importance of targeted, precise, and graduated approaches in strengthening the financial role in promoting enterprise digital technology innovation. This study offers three key contributions: First, this study provides robust empirical evidence from Chinese listed enterprises. It confirms that D&O insurance promotes digital technology innovation and exhibits time-accumulation and coverage-deepening effects. This finding thereby delineates the specific role of insurance within a national innovation strategy. Second, the study builds a precise measurement of digital technology innovation and then designs a two-tiered indicator system that captures both lower-layer driving innovation and application scenario innovation. It also distinguishes two dimensions of enterprise digital technology innovation, deepening and cross-boundary innovation. Third, this study constructs an integrated framework linking innovation decisions, managerial incentives, and risk management. The results provide a new theoretical foundation for managerial decision-making in high-risk digital innovation.
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