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NTU Management Review Vol. 34 No. 1 Apr. 2024

weakening corporate governance and increasing audit risk and audit fees. In addition to
Hypotheses 1a and 1b, we further examine whether normal (abnormal) insurance coverage
and institutional investors in insurance business relationships have an interaction effect on
audit fees. The interaction effect could be positive or negative, and we do not predict its

direction. Thus, we propose the following hypotheses:
Hypothesis 2a: Holding other conditions constant, compared to institutional investors
without insurance business relationships, institutional investors who have

insurance business relationships with the D&O insured companies will
affect the relationship between normal insurance coverage and audit fees.

Hypothesis 2b: Holding other conditions constant, compared to institutional investors
without insurance business relationships, institutional investors who have

insurance business relationships with the D&O insured companies will
affect the relationship between abnormal insurance coverage and audit
fees.

To test Hypotheses 2a and 2b, we create an indicator variable (INSURER) which
is equal to 1 if the institutional investor has an insurance business relationship with the
insured company and 0 otherwise. We add the interaction terms of INSURER × NORMAL
and INSURER × ABNORMAL into Equation (1) to get Equation (3) and use Equation (3)

to test Hypotheses 2a and 2b. Since the interaction effects of INSURER × NORMAL and
INSURER × ABNORMAL on audit fees could be positive or negative, we do not predict
the signs of β and β in Equation (3).
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3

3. Findings

The results show that if the firm purchases appropriate (normal) D&O insurance
coverage, as the normal D&O insurance coverage increases, the auditor charges lower

audit fees. However, if the firm purchases excess (abnormal) D&O insurance coverage, it
has an adverse effect on the directors’ and managers’ behavior and increases the litigation
risk. Hence, as the abnormal D&O insurance coverage increases, the auditor charges
higher audit fees. Further analysis examines the interaction effect between the D&O

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