Abstract: Directors′ and officers′ liability (D&O) insurance is regarded as a new external governance mechanism, which has been paid more attention in developed countries. How its governance function and the impact on the performance of the company need to be studied in China. Based on the data of Chinese listed companies from 2009 to 2015, the relationships among D&O, market performance and financial performance were tested by the methods of pooled least squares, PSM and Heckman two stages method. The results showed that D&O had a significant positive influence on market performance, but had a significant negative influence on financial performance, which meant that incentive effect and opportunism behavior coexisted. The results provided an empirical basis for listed companies to deeply understand D&O and to strengthen the construction of modern enterprise system. Therefore, we should introduce liability insurance into companies and improve the construction of governance system to improve the governance function of D&O.

Key words: directors′ and officers′ liability insurance, market performance, financial performance, incentive effect, opportunism behavior