Journal of Economics and Management Volume 17, No. 1 March, 2021

Internal Control Weaknesses and Credit Ratings: The Moderating Effect of D&O Insurance

Jo-Lan Liu

Department of Accounting Information, National Taichung University of Science and Technology, Taiwan

Ching-Chieh Tsai

Department of Accounting Information, National Taichung University of Science and Technology, Taiwan

Jin-Yun Lin

Department of Accounting Information, National Taichung University of Science and Technology, Taiwan

Abstract

This study mainly examines whether the initial public offering and seasoned equity offering firms (hereafter, IPO/SEO) that disclose internal control weaknesses (hereafter, ICWs) exhibit inferior credit rating levels than non-ICW firms. Moreover, this study uses directors’ and officers’ (hereafter, D&O) liability insurance coverage to test its impact on the association between ICWs and credit ratings. Our empirical evidence provides support for the notion that ICW firms are more prone to have inferior credit ratings to those without ICWs. In addition, empirical evidence indicates that D&O insurance negatively interacts with ICWs to influence credit ratings. Overall, the findings provide consistent evidence that D&O insurance coverage provides protection to stakeholders and plays an inevitable monitoring role in helping mitigate the consequences of the disclosure of ICWs on corporate credit ratings, thereby improving corporate credit ratings.

Keywords：Internal Control Weakness, Credit Ratings, Directors’ and Officers’ Liability Insurance, Creditworthiness.

JEL Classifications： G22, G24, G34, M48.

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