Directors' and Officers' Liability Insurance and Audit Fees: Evidence from China

Abstract

This paper aims to deeply investigate the relationship between Directors' and Officers' Liability Insurance (hereinafter referred to as D&O insurance) and audit fees. Based on data from China's A-share listed companies from 2009 to 2022, this study empirically analyzes the specific impact of D&O insurance on audit fees. The results show that after purchasing D&O insurance, listed companies experience a significant increase in audit fees. This conclusion remains valid after robustness tests, confirming the positive role of D&O insurance in corporate governance. Further analysis of its mechanism reveals that the increase in audit fees stems from the demand for high audit quality driven by D&O insurance as a governance mechanism, reflecting its supervisory incentive effect rather than resulting from opportunistic and moral hazard behaviors. Additionally, the study finds a significant interactive effect between D&O insurance and audit fees, further validating the existence of its supervisory incentive effect. This paper provides strong evidence for the positive impact of D&O insurance on audit fees. These findings not only deepen our understanding of the governance effects of D&O insurance but also provide important theoretical support and empirical evidence for the future development of D&O insurance in China.