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The Interrelationship among Normal and Abnormal D&O Insurance Coverage, Institutional Investor
Characteristics and Audit Fees

insurance coverage and the institutional investor in the insurance business relationship on
audit fees. When the firm purchases appropriate D&O insurance coverage, the institutional
investor in the insurance business relationship has an information advantage, which
enhances the monitoring mechanism. Thus, the auditor charges lower audit fees for

clients who have an institutional investor in the insurance business relationship. On the
other hand, when the firm purchases excess D&O insurance coverage, due to conflicts of
interest, an institutional investor is afraid of losing current or potential business if they

oppose management’s decision and are less likely to deter the directors’ and managers’
opportunistic behavior, which increases the firm’s litigation risk. Thus, the auditor charges
higher audit fees for clients who have an institutional investor in the insurance business
relationship.

4. Implications and Research Limitations

The negative relationship between normal D&O insurance coverage and audit fees

implies that appropriate D&O insurance coverage helps improve corporate governance.
However, it is worth noting that more than half of Taiwanese listed companies and
OTC (Over-the-counter) companies have insufficient insurance coverage, implying that
they may not obtain the expected benefit of D&O insurance on improving corporate
governance. On the other hand, if companies purchase excess (abnormal) D&O insurance

coverage, it has an adverse effect on the directors’ and managers’ behavior and increases
the litigation risk. Hence, this paper suggests that regulatory authorities and auditors
should examine the appropriateness of the amount of D&O insurance purchased by
companies and also consider whether institutional investors have insurance business

relationships with the insured companies.
The research limitations of this paper are as follows. The main results of this
paper are based on the D&O insurance coverage amounts scaled by the year-end equity.
Different scaling methods, such as year-end or average total assets, may result in different

values of estimated normal and abnormal insurance coverage, and the empirical results
may also differ. In addition, the operating performance of a company in a year directly
affects the year-end equity or total assets, which in turn affects the estimated normal and
abnormal insurance coverage. Future studies may use other methods to estimate normal

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