The Research On The Influence Of Directors' And Officers' Liability Insurance On Audit Fees

With the improvement of laws and regulations,the enhancement of market supervision and the improvement of investors' awareness of safeguarding their rights,the number of civil compensation lawsuits faced by listed companies has been on the rise.The occupational risks of directors,supervisors and senior executives have surged.As an important tool of risk transfer,Directors 'and Officers' Liability Insurance(D&O Liability Insurance)aims to evade or lessen the risk of liability for directors,supervisors and senior management incurred by improper behavior in performing their duties,to protect the personal property of directors,supervisors and senior executives,to encourage them to make management decisions diligently and fearlessly.D&O liability insurance,as an important complement to the corporate governance mechanism,has become quite popular in developed countries such as Europe and the United States.The ratio of insured listed companies exceeds 90%.The demand for D&O liability insurance of listed companies in China shows a significant upward trend.Scholars have done a lot of research on the operating mechanism,legislation,practice and motivation on demand of D&O liability insurance.However,there is still controversy in theorists about the governance effect and economic consequences of D&O liability insurance.According to the external supervision hypothesis,in order to safeguard its own interests,insurance companies will strengthen the supervision of insured companies,standardize and restrain management behaviors of managers,and help to improve corporate governance.The opportunist hypothesis argues that the D&O liability insurance's effect of "disclaimer" shifts risk to insurers,which may exacerbate speculation and moral hazard among directors and senior management.However,most of the existing related researches are from the perspective of insurers.Few researches focus on the impact of D&O liability insurance on external stakeholders.In particular,based on Signaling Theory,it is a matter of concern how will the auditor view the signal of corporate risk characteristic transmitted by the purchase of company's D&O liability insurance,which will affect the audit risk judgment,and ultimately will affect the audit fee.In order to further explore the relationship between D&O liability insurance and audit fees,this paper systematically analyzes the internal mechanism and the degree of influence of directors' liability insurance on the audit fees.The main research work is as follows:(1)The game analysis of managers' opportunistic behavior and auditors' external audit.Considering that corporate risk characteristic are the internal information of the company,there is information asymmetry between the external auditor and the company management,and the auditors need to make decisions through observation of behavior of managers,and then judge the audit risk.Based on the literature of D&O liability insurance and audit fees,the article focuses on the signal of how the purchase of company's D&O liability insurance is transmitted to auditors based on Signaling Theory,and establishes an incomplete information game model to describe the interaction between manager's opportunistic behavior in listed companies and auditor's external audit,the equilibrium analysis of game shows that auditors are more likely to carry out high-quality audits for companies insuring D&O liability insurance.(2)The empirical research on Propensity Score Matching studies the effect of directors' and officers' liability insurance on the audit fees.In order to further explore the type of signal that D&O liability insurance has communicated to the auditor,the article takes the listed companies in Shanghai and Shenzhen as the research samples from 2012 to 2016,using Propensity Score Matching,after controlling the characteristics of purchase of D&O liability insurance from aspects of business risk,financial status and corporate governance,we can combine multiple indicators that affect the company's purchase of D&O liability insurance into one indicator by calculating the propensity score,so that we can conduct multiple matching to study the impact of D&O liability insurance on the net effect of audit fees.The empirical results show that insuring D&O liability insurance will significantly increase the audit fees,In the robustness test,the treatment effect model is used to control the endogeneity problem,and a similar conclusion is obtained that the listed company insures D&O liability insurance to convey a negative signal of management opportunistic behavior to the auditor.(3)Policy suggestions.Based on the results of theoretical and empirical analysis,from improving the information disclosure system of D&O liability insurance of capital markets,improving corporate governance and optimizing the insurance contract design,proposed the policy suggestions for improving the D&O liability insurance system in China,the results of the study enrich the effect of D&O liability insurance on Audit Pricing in China's capital market.