The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1321-7348.htm

Insurance claims and audit quality: Insurance

claims and
evidence from trade credit audit quality

insurance in Chinese listed firms

Songsheng Chen 97
Beijing Institute of Technology, Beijing, China
Received 27 August 2021
Jun Guo Revised 17 October 2021
Rutgers-Camden, Camden, New Jersey, USA Accepted 19 October 2021

Yingying Tian
Renmin University of China, Beijing, China, and
Lijuan Yan
Beijing Union University, Beijing, China

Abstract
Purpose – Using unique trade credit insurance data from China, we examine whether trade insurance claims
are associated with audit efforts and audit quality.
Design/methodology/approach – The paper is based on a sample of Chinese firms to study insurance
claims of trade credit insurance that affects abnormal audit fees.
Findings – In this study, we find that firms with high insurance claims pay higher abnormal audit fees.
Further, our findings indicate that firms with high insurance claims have a short audit report lag and tend to
select local audit firms.
Originality/value – To the best of our knowledge, this is the first study to investigate the association between
trade credit insurance claims and audit efforts. In addition, we contribute to the literature on the agency cost of
abnormal audit fees.
Keywords Insurance claims, Trade credit insurance, Abnormal audit fees, Audit report lag
Paper type Research paper

1. Introduction
Trade credit insurance is used to facilitate trade and regarded as one risk-management tool to
protect insured companies from loss due to credit risks involving foreign buyers, such as non-
payment, bankruptcy or political unrest (Jones, 2010). Non-payment of accounts receivable
can be a serious financial and operational threat for a company in today’s competitive and
challenging environment [1]. A trade credit insurance policy, which indemnifies insured firms
against loss on uncollected accounts receivable [2], is one of the accounts receivable
management tools (Mian and Smith, 1992).
Insurance claims under trade credit insurance policies are formal requests from insured
firms for payment of losses from uncollectible accounts receivable from buyers. According to
a joint survey of members of the International Union of Credit Investment Insurers and the
International Credit Insurance and Surety Association, more claims were filed under trade
credit insurance policies in 2015 and 2016 than at any time since the 2007–2008 global
financial crisis [3]. Some studies find that extremely high claims may carry the risk of
insurance fraud (Miyazaki, 2009; Warren and Schweitzer, 2018). For example, the insurance
claims may contain misrepresentation or false statements, in which the risk is very high and

Funding: The work was supported by the Youth Project of Beijing Social Science Foundation Asian Review of Accounting
Vol. 30 No. 1, 2022
(21GLC037), Rutgers School of Business Camden summer research grant, National Natural Science pp. 97-120
Foundation of China NSFC-71972011 and Academic Research Projects of Beijing Union University © Emerald Publishing Limited
1321-7348
(SK90202103, SK90202110, JS10202004 and XP202011). DOI 10.1108/ARA-08-2021-0156
ARA costly for the insured firms. Insurance claims are related to unseen business risks. Some high
30,1 insurance claims may imply the existence of an increasingly unseen firm risk related to cash
flows, accounts receivable and earnings.
We are interested in investigating the association between insurance claims and
abnormal audit fees because abnormal audit fees are not only related to audit efforts
(Eshleman and Guo, 2014; Sharma et al., 2017) but also related to agency costs from individual
audit partners (Asthana and Boone, 2012). Abnormal audit fee is the difference between the
98 actual audit fee paid and the fee that was expected given the client’s size, risk and complexity
(Eshleman and Guo, 2014). On the one hand, audit fee is a measure of audit effort, and low
audit fees could damage audit quality (Eshleman and Guo, 2014). On the other hand, auditors
receiving abnormally high audit fees from clients may sacrifice their independence, which
provides opportunities for client managers to engage in questionable accounting practices
(DeAngelo, 1981). Prior studies find that abnormal audit fees are negatively correlated with
audit quality, consistent with the agency theory of abnormal audit fees (Asthana and Boone,
2012; Choi et al., 2010). According to agency theory, an audit firm is a decentralized
organization in which individual audit partners act as agents for the audit firm (Liu and
Simunic, 2005). Kinney and Libby (2002) note that “Unexpected fees may also better capture
the profitability of the services provided more insidious effects on economic bond may result
from unexpected non-audit and audit fees that may more accurately be likened to attempted
bribes.” As Asthana and Boone (2012) states that the auditor may compromise audit integrity
if the expected gain is more than the expected loss from the overall client portfolio and
litigation costs, and penalties.
Trade credit insurance provides an interesting setting to examine the question of whether
economic bonding from abnormal audit fees undermines audit quality. Due to high business
risk and low earnings quality, clients with high insurance claims are more likely to pay high
abnormal audit fees for a favorable corporation image. The audit market in China is unique
and highly competitive. Given the competitive audit market in China, auditors have
incentives to compromise audit quality for clients (Chen et al., 2007). The positive correlation
between abnormal audit fees and insurance claims reflects the degree of economic bonding
between the auditor and the risky client, and greater economic bonding can impair the
auditor’s independence and thus degrade audit quality. We contribute to the literature
because there is little evidence about how insurance claims affect the relationship between
auditors and clients due to the difficulty in obtaining insurance claims data as well as the
impact of insurance claims on abnormal audit fees. In this study, we use one unique data set
from Chinese firms’ trade credit insurance to explore the link between insurance claims and
abnormal audit fees.
Further, we test the association between insurance claim and audit report lag because
audit report lag is widely used as a proxy for audit efficiency. Sharma et al. (2017) find
mandatory audit partner rotation is associated with longer audit report lags as measured by
the number of days from the end of the fiscal year to the audit report date. Short audit report
lags may indicate lower audit quality because auditors put less efforts on the audit report
(Knechel and Payne, 2001). For example, Knechel and Sharma (2012) find that higher non-
audit service fees are associated with shorter audit report lags before SOX. We predict that
short audit lags occurring in conjunction with high audit fees might undermine audit quality.
We find that the firms with higher insurance claims under trade credit insurance policies
pay higher abnormal audit fees but have a shorter audit report lag and are more likely to
choose local auditors for favorable corporation image. To the best of our knowledge, this is
the first study to investigate the association between trade credit insurance claims and audit
efforts. In addition, we contribute to the literature on the agency cost of abnormal audit fees.
When expected gains are greater than expected costs, it is possible that individual auditors
compromise audit quality to favor their clients. Bazerman et al. (1997) discuss the
impossibility of auditor independence and mention that some auditors are accountable for Insurance
certifying faulty financial statements. This study is of great significance in understanding the claims and
audit quality of firms with high insurance claims. Finally, our results provide useful
information to regulators that insured companies may need to disclose insurance claim
audit quality
information in their financial reports.
The paper proceeds as follows. In Section 2, we provide background, review the literature
and develop our hypotheses. Section 3 describes the research methodology. In Section 4, we
explain the data and summary statistics. Section 5 presents the empirical results. Section 6 99
provides additional sensitivity tests. Section 7 concludes the paper.

2. Background, literature review and hypothesis development

2.1 Background on trade credit insurance and insurance claims
According to the World Bank report cited in Jones (2010), [4] trade credit insurance first began
in the UK in the 1820s. Trade credit insurance is well known for protecting firms from non-
payment loss from foreign or export accounts receivable. Usually, trade receivables represent
30%–40% of the insured firm’s balance sheets (Jones, 2010). Firms facing a risk from the late
payment or non-payment of accounts receivable are more likely to pay a premium to buy
trade credit insurance because indemnification of losses is the main reason to purchase trade
credit insurance. Trade credit insurance not only carries the functions of risk sharing and
financial compensation, but also can signal important information to observers (Core, 2000).
The decision to purchase insurance, the scope of insurance and the insurance terms
(especially the insurance premiums, the maximum insurance claims and the deductible) all
transmit signals about the risk status and governance of the insured enterprise to
participants in the capital market (Core, 2000; Boyer and Stern, 2012).
It is plausible to regard an insurance claim as an indicator of business risk [5]. Previous
research (Miyazaki, 2009; Warren and Schweitzer, 2018) holds that some insurance claims are
possibly unethical or may contain potential risk of insurance fraud if the claim is extremely
high. Miyazaki (2009) finds that the most common insurance fraud activity is the practice of
padding claim amounts in the event of a loss. Moreover, higher deductible amounts result in
stronger perceptions that insurance claim padding is fair to the insurance company, weaker
perceptions that the behavior is unethical, and higher proposed claim award amounts.
Figure 1 reports the detailed process of credit insurance claims including each step, such
as determining when the loss occurred, reporting the loss in a timely manner, making a claim
application, and receiving indemnity for losses [6]. In China, only a few insurance firms offer
credit insurance against political, commercial and credit risks [7]. However, the Chinese
market for trade credit insurance has experienced extraordinary growth since 2009, because
participants want to obtain bank financing from trade credit insurance due to the risk of
uncollectible accounts receivable [8]. We provide an anecdotal evidence from one sample firm
that purchases trade credit insurance as an accounts receivable management tool [9].
Previous studies also find that there is an ex post moral hazard in insurance claims
(Cummins and Tennyson, 1996). Ex post moral hazard is possible when the claimant has
more information about the state of nature following the accident than the insurer. If the
insurer can perfectly observe the state of nature following an accident, it will pay claims only
for the objective loss amounts. However, if the insurer does not perfectly observe the objective
loss distribution, claimants have an incentive to take actions that affect the claimed loss
distribution. Ex post moral hazard can affect the loss distribution by increasing the number
of claims filed (falsified claims) or by increasing the amount of the claimed loss (exaggerated
claims), which may affect the auditors’ perception of the risk of the insured firms with high
insurance claims.
ARA The insured firm
30,1 Makes a timely report of losses and
Determines when the Cooperates in
chooses the method of recovering debt derogation after claiming
loss occurred
losses
Entrust the insurer to recover debt

Recover debt by itself

100

Does the insured firms receive

Yes all its accounts receivables from
the buyer?
No
The insured firm withdraws The insured firm
the insurance claim makes a claim application

The insurance
company

Pays indemnity to Verifies indemnity by

Figure 1. the insured firms the insurers for losses
The process of credit
insurance claims

2.2 Literature review and hypothesis development

Previous research shows that some insurance claims are possibly unethical or may contain
potential risk of insurance fraud if the claim is extremely high (Miyazaki, 2009; Warren and
Schweitzer, 2018). For example, the insurance claims may have misrepresentation or false
statements. The risk of non-payment of a claim from insurers may be high and costly for the
insured firms. The most common insurance fraud activity is the practice of padding claim
amounts in the event of a loss (Miyazaki, 2009). One experimental study shows that higher
deductible amounts result in stronger perceptions that insurance claim padding is fair to the
insurance company, weaker perceptions that the behavior is unethical and higher proposed
claim award amounts (Miyazaki, 2009). As a result, firms with high trade credit insurance
claims may contain more asymmetrical information that may make it difficult for auditors to
test the audit risk.
Audit fees include the input of audit efforts and risk premium. Houston et al. (1999) further
develops the audit pricing model and divide the risk premium into audit risk premium and
non-audit risk premium. Auditors assess the risks of different customers and ensure that the
risks are under control (Johnstone and Bedard, 2003). For some risky clients, auditors may
increase working hours (Bell et al., 2001; Elliott et al., 2013), assign more professional partners
and experienced auditors (Johnstone and Bedard, 2004; Venkataraman et al., 2008; Elliott
et al., 2013; Sharma et al., 2017) and charge a higher audit risk premium due to the higher audit
risk (Johnstone, 2000). Some auditors may also charge a non-audit risk premium for a
portfolio of risky clients who are more likely subject to litigation to compensate for the
additional costs incurred by auditors (Jones and Raghunandan, 1998). For clients with high
insurance claims and risks from uncollectible accounts receivable, auditors may invest more
audit resources and charge higher audit fees to reduce the risk of fraud or misstatement
(Johnstone and Bedard, 2003). Johnstone and Bedard (2004) find that auditors increase audit
fees to intimidate some high-risk clients.
 The audit market is highly competitive in China, and the existence of many small audit Insurance
firms results in intense price competition. According to Huang et al. (2016), the Chinese claims and
government has made efforts to enhance audit quality by restructuring audit firms from
limited liability organizations to partnership organizations to improve audit quality and
audit quality
audit market concentration. If auditors make more efforts and devote more resources to an
audit client, then the client firm will pay a higher audit fee. However, according to agency
theory, individual auditors act as the agents for audit firm (Liu and Simunic, 2005). And
high abnormal audit fees sometimes may capture the portion of the expected benefit for 101
individual auditors from acquiescing to client demands (Trompeter, 1994). Asthana and
Boone (2012) argue that positive abnormal audit fees reflect the degree of economic bonding
between the auditor and the client, and greater economic bonding can impair the auditor’s
independence and thus degrade audit quality. However, negative abnormal audit fees
reflect the extent of client bargaining power, and greater client bargaining power decrease
audit quality (Barnes, 2004; Asthana and Boone, 2012). Given the competitive audit market
in China, auditors have incentives to compromise audit quality for economically important
clients (Chen et al., 2007). Xie et al. (2010) document that firms with low earnings quality pay
abnormally high audit fees to shop for favorable audit opinions. Therefore, our hypothesis
is as follows:
H1. Firms with high trade credit insurance claims are more likely to pay high abnormal
audit fees.

3. Research design
To investigate our hypothesis, we follow Hogan and Wilkins (2008), and Chang et al. (2019) to
test the association between insurance claim and abnormal audit fees in Eq. (1):
ABFEEi;tþ1 ¼ μ0 þ μ1 INSCLAIMi;t þ μ2 SIZEi;t þ μ3 CURRENTi;t þ μ4 INVi;t þ μ5 ROAi;t
þ μ6 LOSSi;t þ μ7 OPINIONi;t þ μ8 TENUREi;t þ μ9 EXPERTISEi;t
þ μ10 AUDITORi;t þ μ11 LEVi;t þ μ12 CATAi;t þ μ13 GROWTHi;t
þ μ14 AUDCHANGEi;t þ μ15 BTMi;t þ μ16 RECi;t þ μ17 PEACEi;t
X
þ μ18 HIGHTECHi;t þ QUARTER þ σ it
(1)

The dependent variable abnormal audit fee (ABFEE) is the residuals from the audit
pricing model in period tþ1 following Chang et al. (2019) to construct the audit pricing
model

lnAUDFEEi;t ¼ λ0 þ λ1 SIZEi;t þ λ2 CURRENTi;t þ λ3 INVi;t þ λ4 ROAi;t þ λ5 LOSSi;t

þ λ6 OPINIONi;t þ λ7 TENUREi;t þ λ8 EXPERTISEi;t þ λ9 RECi;t
þ λ10 LEVi;t þ λ11 Z  SCOREi;t þ λ12 CATAi;t þ λ13 EXTRAi;t
X
þ λ14 TOBINQi;t þ λ15 ARLi;t þ YEAR þ εit

Our variable of interest in Eq. (1) is insurance claim (INSCLAIM), which is ranked from 1 to 10
according to the ratio of reported net loss to credit limit. If auditors charge higher audit fees
for firms with higher insurance claims, μ1 is expected to be positive. Following prior studies
(e.g. Hogan and Wilkins, 2008; Ghosh and Tang, 2015; Sharma et al., 2017), we control
variables related to client characteristics and auditor characteristics that may affect
abnormal audit fees. Prior research shows that audit fees are positively related to firm size
ARA and leverage (Whisenant et al., 2003; Bell et al., 2001). The natural logarithm of total assets
30,1 (SIZE) and the ratio of total liabilities to total assets (LEV) are included to capture these
effects. Hogan and Wilkins (2008) provide evidence that audit fees are negatively related to
firm liquidity and profitability. Consistent with this research, we control the ratio of current
assets to current liabilities (CURRENT), the ratio of inventory to total assets (INV), the ratio
of net income to total assets (ROA) and the growth rate of operating income (GROWTH) in the
regression model. Hogan and Wilkins (2008) and Gul et al. (2003) find that firms experiencing
102 net losses and using Big4 audit firms are more likely to pay higher audit fees. But Semba and
Keto (2019) find that the audit quality difference between Big N and Non-Big N are not big in
some Asian countries. Eq. (1) includes dummy variable LOSS, which equals to one when net
income is negative and zero otherwise, and dummy variable AUDITOR, equal to one if the
auditor is one of the Big 4 accounting firms and zero otherwise. Ghosh and Tang (2015) argue
that firms pay more audit fees when they receive a non-clean audit opinion or have fewer
current assets, so we include OPINION (an indicator variable equals to one when the auditor
issues an unqualified opinion in period t, and zero otherwise) and CATA (the ratio of current
assets to total assets). Audit firm tenure (TENURE) is the number of years served by the
audit firm controlling for potential effect of short auditor-client association on audit fees
(Ghosh and Lustgarten, 2006). We include EXPERTISE to control auditor industry expertise
consistent with Simunic (1980) and Wang et al. (2017). In addition, we control auditor change
(AUDCHANGE) because auditor rotation is associated with audit quality (Kalanjati et al.,
2019). We also control book-to-market ratio (BTM) and accounts receivable (REC) following
Chang et al. (2019) that is especially focus on Chinese audit pricing data. We also control
global peace index scores (PEACE) according to Aswath (2018). Low global peace index
scores indicate more peaceful institutional environment. Following prior research (Francis
et al., 1994; Krishnan et al., 2011), we control HIGHTECH, an indicator variable that equals to
one if the firm belongs to one of the following industries: pharmaceuticals, computers,
electronics, programming, R&D services and zero otherwise, in Eq. (1). We also control
quarter fixed effect because our regressions are based on case-quarter observations.

4. Sample and data description

4.1 Sample selection
We obtain trade credit insurance data from one insurance company [10] in China during the
years 2011–2015 [11]. In the main test, we use quarterly data of listed companies that
purchase credit insurance [12]. There are 626 observations representing 68 companies in our
main sample. Z-SCORE is from the WIND Database, and all other financial information is
from the China Stock Market and Accounting Research (CSMAR) database. Appendix 2 and
Appendix 3 describe the industry distribution of sample firms as well as the importance of
credit limits.

4.2 Summary statistics and correlation

Table 1 presents the summary statistics of the variables included in our regression models.
All continuous variables are winsorized at the 1st and 99th percentiles. The mean (median) of
the rank of insurance claim scaled by credit limit (INSCLAIM) is 5.567 (6), indicating that the
sample company’s insurance claim is relatively high. On average, most sample firms are
profitable with positive ROA, high leverage and good growth. In addition, 20.8% of sample
companies are in industries with high litigation risk, such as pharmaceuticals, computers,
electronics, programming and R&D services (HIGHTECH).
Table 2 provides the Pearson correlation coefficients of the variables used in the
regressions. Insurance claims (INSCLAIM) are positively correlated with abnormal audit fees
(ABFEE), which suggests that companies with high insurance claims are more likely to pay
 n Mean Q1 Median Q3 Std.Dev
Insurance
claims and
ABFEE 626 0.034 0.188 0.003 0.299 0.354 audit quality
INSCLAIM 626 5.567 3.000 6.000 8.000 2.862
SIZE 626 23.485 22.242 23.711 24.662 1.517
CURRENT 626 1.317 1.011 1.206 1.419 0.473
INV 626 0.181 0.107 0.147 0.236 0.106
ROA 626 0.010 0.001 0.008 0.023 0.048 103
LOSS 626 0.214 0.000 0.000 0.000 0.410
OPINION 626 0.021 0.000 0.000 0.000 0.143
TENURE 626 4.479 3.000 4.000 6.000 2.524
EXPERTISE 626 0.122 0.033 0.086 0.227 0.110
AUDITOR 626 0.153 0.000 0.000 0.000 0.361
LEV 626 0.650 0.553 0.681 0.776 0.151
CATA 626 0.694 0.601 0.736 0.836 0.173
GROWTH 626 0.360 0.698 0.456 1.000 0.794
AUDCHANGE 626 0.145 0.000 0.000 0.000 0.353
BTM 626 1.824 0.733 1.465 2.405 1.350
REC 626 0.177 0.069 0.174 0.247 0.114
PEACE 626 2.184 2.092 2.243 2.243 0.375
HIGHTECH 626 0.208 0.000 0.000 0.000 0.406
ARL 626 3.834 3.367 3.912 4.143 0.542
ZFC 626 0.686 1.308 0.529 0.059 0.969
AUDFEE 626 14.432 13.864 14.431 14.994 0.805
jDAj1 626 0.048 0.017 0.032 0.062 0.046
IC 626 645.254 579.060 658.490 733.130 144.456
BOARD 626 9.188 9.000 9.000 11.000 1.938
BDIND 626 0.376 0.333 0.333 0.429 0.062
DUAL 626 0.204 0.000 0.000 0.000 0.404
LOCAL 626 0.847 1.000 1.000 1.000 0.361
SOE 626 0.780 1.000 1.000 1.000 0.415
Z-SCORE 626 2.971 1.984 2.444 3.755 1.671
Note(s): Table 1 presents the descriptive statistics for all the variables used in main analysis. All variables are Table 1.
defined in Appendix 1 Descriptive statistics

high abnormal audit fees. Among the explanatory variables, the absolute values of pairwise
correlations are generally below 0.20 for the variables used in the main regression models,
which suggests that there is little cause for concern about multi-collinearity in our
forthcoming regressions.

5. Empirical regressions
To investigate whether firms with high insurance claims pay higher abnormal audit fees, we
perform OLS regression results in Table 3 according to Equation (1). Column (1) investigates
the association between insurance claim (INSCLAIM) and abnormal audit fees controlling
firm characteristics. The coefficient on insurance claim (INSCLAIM) is positive and significant
at the 1% level. We control for quarter fixed effects in column (2). The coefficient on insurance
claim (INSCLAIM) is also positive and significant. These results indicate that insured firms
pay higher abnormal audit fess when the firms have higher insurance claims, which supports
Hypothesis 1 [13]. Higher inventory firms and less profitable firms are charged higher
abnormal audit fees consistent with Ghosh and Tang (2015). Moreover, auditors with high
industry expertise are more likely to pay high abnormal audit fees consistent with previous
research (Hogan and Wilkins, 2008; Ghosh and Tang, 2015). The coefficient on global peace
index scores (PEACE) is negative and significant at the 1% level, which indicates firms in
more peaceful environment are more likely to pay high abnormal audit fees.
 30,1

104

matrix
ARA

Table 2.
Pearson correlation
V1 V2 V3 V4 V5 V6 V7 V8 V9 V10 V11 V12 V13 V14 V15 V16 V17 V18 V19

V1:ABFEE 1
V2:INSCLAIM 0.137 1
V3:SIZE 0.107 0.010 1
V4:CURRENT 0.131 0.014 0.119 1
V5:INV 0.057 0.128 0.196 0.195 1
V6:ROA 0.177 0.027 0.024 0.298 0.047 1
V7:LOSS 0.158 0.025 0.005 0.212 0.008 0.550 1
V8:OPINION 0.071 0.099 0.255 0.124 0.126 0.083 0.170 1
V9:TENURE 0.074 0.125 0.004 0.008 0.271 0.016 0.151 0.177 1
V10:EXPERTISE 0.119 0.114 0.355 0.107 0.190 0.041 0.111 0.148 0.083 1
V11:AUDITOR 0.080 0.169 0.232 0.123 0.039 0.147 0.217 0.060 0.120 0.129 1
V12:LEV 0.007 0.059 0.326 0.646 0.499 0.395 0.269 0.017 0.149 0.079 0.022 1
V13:CATA 0.131 0.022 0.004 0.348 0.442 0.058 0.015 0.210 0.232 0.118 0.063 0.305 1
V14:GROWTH 0.044 0.001 0.058 0.023 0.011 0.146 0.099 0.044 0.008 0.011 0.051 0.019 0.113 1
V15:AUDCHANGE 0.050 0.140 0.189 0.031 0.093 0.065 0.105 0.060 0.569 0.051 0.158 0.006 0.039 0.023 1
V16:BTM 0.138 0.070 0.458 0.294 0.544 0.122 0.037 0.111 0.102 0.181 0.103 0.553 0.205 0.005 0.091 1
V17:REC 0.074 0.005 0.046 0.406 0.224 0.039 0.057 0.129 0.111 0.010 0.240 0.040 0.425 0.123 0.098 0.190 1
V18:PEACE 0.150 0.068 0.283 0.073 0.110 0.085 0.123 0.293 0.090 0.068 0.047 0.104 0.005 0.023 0.027 0.105 0.004 1
V19:HIGHTECH 0.031 0.073 0.188 0.256 0.216 0.073 0.162 0.047 0.106 0.080 0.212 0.342 0.062 0.062 0.122 0.138 0.140 0.003 1
Note(s): Table 2 reports the correlation coefficients from the Pearson correlations. Correlations significant at the 0.1 level or higher (two-tailed) are in bold. All variables are defined
in Appendix 1
Dependent variable 5 ABFEE
Insurance
(1) (2) claims and
Variable Exp sign Coe t-stat Coe t-stat audit quality
Intercept ? 0.891*** (2.715) 0.912* (1.874)
INSCLAIM þ 0.014*** (2.919) 0.014*** (2.955)
SIZE þ 0.026 (1.447) 0.037* (1.816)
CURRENT  0.033 (0.336) 0.077 (0.802) 105
INV þ 1.022*** (5.772) 1.028*** (5.787)
ROA  1.446*** (4.810) 1.240*** (3.711)
LOSS þ 0.049 (1.378) 0.052 (1.246)
OPINION ? 0.073 (0.745) 0.075 (0.721)
TENURE þ 0.014* (1.932) 0.010 (1.314)
EXPERTISE þ 0.660*** (3.599) 0.739*** (4.021)
AUDITOR þ 0.038 (0.652) 0.053 (0.906)
LEV þ 0.104 (0.329) 0.236 (0.747)
CATA þ 0.607*** (3.778) 0.727*** (4.212)
GROWTH  0.050*** (3.087) 0.097 (1.425)
AUDCHANGE ? 0.040 (0.839) 0.022 (0.472)
BTM  0.066*** (4.718) 0.059*** (3.227)
REC þ 0.150 (0.718) 0.141 (0.628)
PEACE  0.119*** (2.662) 0.125*** (2.663)
HIGHTECH þ 0.043 (1.271) 0.048 (1.319)
QUARTER Fixed Effect No Yes
Observations 626 626
2
Adj.R 0.184 0.190
Note(s): ***, **, and * denote significance at the 1%, 5% and 10% level, respectively. Table 3 shows OLS
regression analysis of the impact of insurance claims of trade credit insurance (INSCLAIM) on abnormal audit Table 3.
fees (ABFEE). The dependent variable is ABFEE, the residuals from the audit pricing model. T-values are The impact of
reported in parentheses with White adjusted standard errors at the firm level. Other variables are defined in insurance claims on
Appendix 1 abnormal audit fees

6. Additional analysis
6.1 Alternative sample: firms with insurance claims vs firms without insurance claims
It is possible that some firms purchase trade credit insurance but do not claim loss from
insurance companies. According to annual reports during our sample period, there are 2,210
companies with export business but only 68 companies make insurance claims, which
accounts for 3.08% of the export firms and is consistent with the proportion of insurance
claims for trade credit insurance that is generally 3%–5%. We assume that these 2,210 export
companies purchase trade credit insurances. We rank the 68 firms with insurance claims
from 1 to 10 according to the ratio of total reported losses to total credit limit at the firm-
quarter level and the other 2,142 export companies without insurance claims as zero. We
select these 2,210 export companies as our sample firms and finally obtain 24,264 firm-
quarter observations.
Table 4 provides additional analysis and examines whether firms with higher insurance
claims would like to pay higher abnormal audit fees according to Equation (1). Column (1)
investigates the association between insurance claim (INSCLAIM_FIRM) and abnormal
audit fees controlling firm characteristics. The coefficient on insurance claim
(INSCLAIM_FIRM) is positive and significant at the 1% level. We control for quarter
fixed effects in column (2). The coefficient on insurance claim (INSCLAIM_FIRM) is still
positive and significant after controlling for factors changing each quarter that are common
to all firms for a given quarter. These results indicate that insured firms pay higher abnormal
audit fess when the firms make higher insurance claims, which supports Hypothesis 1.
ARA Dependent variable 5 ABFEE
30,1 (1) (2)
Variable Exp sign Coe t-stat Coe t-stat

Intercept ? 0.000 (0.006) 0.127 (1.546)

INSCLAIM_FIRM þ 0.041*** (4.666) 0.042*** (4.694)
SIZE þ 0.002 (0.597) 0.003 (0.848)
106 CURRENT  0.007*** (6.346) 0.007*** (6.296)
INV þ 0.003 (0.108) 0.005 (0.172)
ROA  0.251*** (3.518) 0.293*** (4.067)
LOSS þ 0.011 (1.021) 0.011 (1.028)
OPINION ? 0.072*** (4.413) 0.072*** (4.380)
TENURE þ 0.000 (0.068) 0.000 (0.412)
EXPERTISE þ 0.182*** (4.254) 0.184*** (4.287)
AUDITOR þ 0.518*** (30.053) 0.517*** (29.916)
LEV þ 0.057*** (2.953) 0.060*** (3.074)
CATA þ 0.093*** (4.073) 0.092*** (4.031)
GROWTH  0.008 (0.950) 0.008 (0.850)
AUDCHANGE ? 0.047*** (6.033) 0.052*** (6.503)
BTM  0.043*** (9.420) 0.052*** (10.513)
REC þ 0.088*** (2.638) 0.086** (2.539)
PEACE_AVG  0.051** (2.385) 0.051** (2.402)
HIGHTECH þ 0.011* (1.857) 0.010* (1.690)
QUARTER Fixed Effect No Yes
Observations 24,264 24,264
Adj.R2 0.068 0.069
Table 4. Note(s): ***, ** and * denote significance at the 1%, 5% and 10% level, respectively. Table 4 shows OLS
The impact of regression analysis of the impact of insurance claims of trade credit insurance (INSCLAIM_FIRM) on
insurance claims on abnormal audit fees (ABFEE) with the sample of 2,210 export companies. The dependent variable is ABFEE,
abnormal audit fees: the residuals from the audit pricing model. T-values are reported in parentheses with White adjusted standard
Additional analysis errors at the firm level. Other variables are defined in Appendix 1

6.2 Propensity score matching

It seems plausible that the nature of insurance claims is endogenous. This indicates that our
conclusion is possible to result from firm attributes that influence abnormal audit fees instead
of the insurance claims per se. We further do a propensity score matching procedure. We
match each claim firm with one non-claim firm as in Table 5. Specifically, we include the
determinants of the insurance claims to obtain the propensity score as in Equation (2):

CLAIM DUMMYi;t ¼ χ 0 þ χ 1 ZFCi;t þ χ 2 ICi;t þ χ 3 SIZEi;t þ χ 4 LEVi;t

þ χ 5 GROWTHi;t þ χ 6 BOARDi;t þ χ 7 BDINDi;t (2)
X
þ χ 8 FOREIGNi;t þ χ 9 HIGHTECHi;t þ QUARTER þ ςit
CLAIM_DUMMYi,t is an indicator variable equals to 1 when the firm files insurance claims
on trade loss to the insurance company in quarter t, and 0 otherwise. Company bankruptcy
index (ZFC) indicates the probability of bankruptcy as in Zmijewski (1984), which influences
the operating risk. IC is the company’s internal control index, reflecting the company’s
internal control quality. Board size (BOARD) is the total number of directors on a firm’s
board. Board independence (BDIND) is the ratio of independent directors to total directors.
The portion of foreign sales (FOREIGN) is defined as the ratio of overseas business income to
total operating income. Other control variables are the same as in equation (1).
We then match each treatment firm with control firm based on the closest propensity
score. We examine the balance between treatment group and control group to ensure that the
Panel A: Test of the effectiveness of the matching process
Insurance
Matched sample claims and
Mean T-test audit quality
Variable Treated group Control group t P-value

ZFC 1.019 1.018 0.010 0.989

IC 652.910 637.720 1.000 0.316
SIZE 23.210 23.107 0.800 0.426 107
LEV 0.603 0.601 0.130 0.896
GROWTH 0.415 0.425 0.380 0.705
BOARD 9.005 8.986 0.110 0.914
BDIND 0.385 0.387 0.410 0.683
FOREIGN 0.305 0.335 1.170 0.242
HIGHTECH 0.263 0.249 0.330 0.742

Panel B: The impact of insurance claims on abnormal audit fees: Propensity score match
Dependent variable 5 ABFEE
(1) (2)
Variable Exp sign Coe t-stat Coe t-stat

Intercept ? 0.117 (0.172) 0.063 (0.080)

CLAIM_DUMMY þ 0.661*** (4.168) 0.690*** (4.191)
SIZE þ 0.012 (0.394) 0.015 (0.461)
CURRENT  0.035*** (2.605) 0.037*** (2.713)
INV þ 0.681* (1.896) 0.703** (1.984)
ROA  1.298** (2.529) 1.189** (2.192)
LOSS þ 0.255*** (2.958) 0.275*** (3.131)
OPINION ? 0.241** (2.186) 0.258** (2.284)
TENURE þ 0.005 (0.689) 0.003 (0.386)
EXPERTISE þ 0.554** (2.124) 0.503** (1.973)
AUDITOR þ 0.484*** (5.870) 0.469*** (5.570)
LEV þ 0.153 (0.807) 0.141 (0.718)
CATA þ 0.162 (0.550) 0.159 (0.536)
GROWTH  0.084 (0.813) 0.082 (0.825)
AUDCHANGE ? 0.080 (1.285) 0.074 (1.233)
BTM  0.012 (0.414) 0.022 (0.650)
REC 0.387 (1.036) 0.383 (1.029)
PEACE_AVG 0.241*** (3.600) 0.256*** (3.653)
HIGHTECH þ 0.039 (0.871) 0.024 (0.529)
QUARTER Fixed Effect No Yes
Observations 434 434
Adj.R2 0.153 0.168
Note(s): Panel A of Table 5 represents the balance tests of nearest neighbors matching. Panel B of Table 5
shows OLS regression analysis of the impact of insurance claims of trade credit insurance (CLAIM_DUMMY)
on abnormal audit fees (ABFEE) with a matched sample. ***, ** and * denote significance at the 1%, 5% and
10% level, respectively. T-values are reported in parentheses with White adjusted standard errors at the firm Table 5.
level. Other variables are defined in Appendix 1 Propensity score match

observable dimensions of the matched pairs are similar aside from insurance claims. Panel A
of Table 5 presents the balance tests of nearest neighbors matching. As shown in Panel A, the
propensity scores of treatment group are not statistically different from matched group. This
evidence makes us confident that propensity score matching works in achieving balance for
all observable covariates.
We use propensity score matching sample to investigate the association of abnormal audit
fees and the insurance claim (CLAIM_DUMMY) in Panel B of Table 5. The coefficients of the
ARA insurance claim (CLAIM_DUMMY) are also positive and significant at the 1% level when we
30,1 control other firm characteristics variables in column (1) and include quarter fixed effects in
column (2). These robust results provide evidence that firms with insurance claims pay more
abnormal audit fees compared with firms without insurance claims.

6.3 Insurance claims and audit report lag

108 Our main results indicate that the firms with higher trade credit insurance claims are
associated with higher abnormal audit fees. However, it is possible that firms with higher
insurance claims may pay higher abnormal audit fees for favorable corporation image. To
provide additional support for our findings, we further investigate whether the firms with
high insurance claims are associated with audit efficiency. Next, we use audit report lag and
investigate audit efficiency and audit efforts following Habib and Bhuiyan (2011) and Sharma
et al. (2017).
Table 6 presents the regression results. In our regressions, audit report lag (ARL) is
dependent variables. The coefficients of the variable INSCLAIM in column (1) is 0.004 and
statistically significant at the 5% level, indicating that firms with higher insurance claims of
trade credit insurance have shorter audit report lag. In column (2) of Table 6, we add the
control variables of corporate governance, such as board size measured as the number of
directors sitting on the board (BOARD), board independence measured as the ratio of the
number of non-executive directors to the number of total directors (BDIND) and CEO duality
measured as whether current CEO is also the chairman (DUAL). The coefficient on insurance
claims (INSCLAIM) continues to be negative and statistically significant at the 5% level.
These results confirm our findings that insurance claims are negatively associated with audit
report lags. It is possible that auditors do not put too many efforts on the audit report, and it is

Dependent variable 5 ARL

(1) (2)
Variable Coe t-stat Coe t-stat

Intercept 2.724*** (19.125) 2.705*** (19.332)

INSCLAIM 0.004** (2.012) 0.004** (1.990)
SIZE 0.008 (0.819) 0.015 (1.570)
LOSS 0.022 (0.976) 0.037 (1.464)
ZFC 0.001 (0.100) 0.001 (0.102)
TENURE 0.005 (1.284) 0.004 (0.998)
AUDITOR 0.080*** (3.515) 0.080*** (3.449)
AUDFEE 0.035** (2.201) 0.030* (1.891)
INV 0.168* (1.925) 0.169* (1.845)
REC 0.127* (1.770) 0.129 (1.625)
GROWTH 0.014 (0.524) 0.022 (0.792)
jDAj1 0.176 (0.948) 0.131 (0.668)
IC 0.000 (1.422) 0.000 (1.338)
BOARD 0.010* (1.851)
BDIND 0.026 (0.208)
DUAL 0.016 (0.715)
HIGHTECH 0.000 (0.023) 0.005 (0.224)
QUARTER Fixed Effect Yes Yes
Observations 626 626
Adj.R2 0.918 0.919
Table 6. Note(s): ***, ** and * denote significance at the 1%, 5% and 10% level, respectively. Table 6 shows OLS
The impact of regression analysis of the impact of insurance claims of trade credit insurance (INSCLAIM) on audit report lag
insurance claims on (ARL). T-values are reported in parentheses with White adjusted standard errors at the firm level. Other
audit report lag variables are defined in Appendix 1
also possible that auditors issue a quick report to signal good image of firms with high Insurance
insurance claims. The results on both higher audit fees and shorter audit report lags indicate claims and
that the audit quality in firms with higher insurance claims is undermined.
audit quality
6.4 Insurance claims and audit fees
To enhance the robustness of the conclusion, we use natural logarithm of audit fees as the
dependent variable. We model natural logarithm of audit fees as a function of insurance 109
claims and other firm characteristics.
lnAUDFEEi;t ¼ λ0 þ λ1 INSCLAIMi;t þ λ2 SIZEi;t þ λ3 CURRENTi;t þ λ4 INVi;t þ λ5 ROAi;t
þ λ6 LOSSi;t þ λ7 OPINIONi;t þ λ8 TENUREi;t þ λ9 EXPERTISEi;t
þ λ10 RECi;t þ λ11 LEVi;t þ λ12 Z -SCOREi;t þ λ13 CATAi;t þ λ14 EXTRAi;t
X
þ λ15 ARLi;t þ λ16 TOBINQi;t þ λ17 HIGHTECHi;t þ QUARTER þ εit
(3)

Our variable of interest in Eq. (3) is insurance claim (INSCLAIM), which is ranked from 1 to 10
according to the ratio of reported net loss to credit limit. If auditors charge higher audit fees for
firms with higher insurance claims, λ1 is expected to be positive. Following prior studies (e.g.
Hogan and Wilkins, 2008; Ghosh and Tang, 2015; Sharma et al., 2017), we control variables
related to client characteristics and auditor characteristics that may affect audit fees.
Table 7 shows OLS regression analysis of the impact of insurance claims of trade credit
insurance (INSCLAIM) on audit fees (lnAUDFEE). The coefficients of the variable
INSCLAIM in column (1) is 0.015 and statistically significant at the 5% level, indicating
that firms with higher insurance claims of trade credit insurance pay high audit fees. We
control for quarter fixed effects in column (2) of Table 7. The coefficient on insurance claims
(INSCLAIM) continues to be positive and statistically significant at the 1% level. These
results confirm our findings that insurance claims are positively associated with audit fees.

6.5 Insurance claims and earnings management

To enhance the robustness of our findings, we use discretionary accruals as dependent
variable. We model accrual earnings management as a function of insurance claims and other
firm characteristics.
jDAji;t ¼ α0 þ α1 INSCLAIMi;t þ α2 SIZEi;t þ α3 LEVi;t þ α4 CFOi;t þ α5 SALARYi;t
þ α6 GROWTHi;t þ α7 TOP5i;t þ α8 AUDITORi;t þ α9 BOARDi;t þ α10 BDINDi;t
X
þ α11 AGEi;t þ α12 BTMi;t þ α13 HIGHTECHi;t þ QUARTER þ εit
(4)

Accrual earnings quality is measured as the absolute value of discretionary accruals (jDAj1
and jDAj2) derived from the Jones (1991) model and the modified Jones model (Dechow et al.,
1995). Our variable of interest in Eq. (4) is insurance claim (INSCLAIM), which is ranked from
1 to 10 according to the ratio of reported net loss to credit limit. We follow previous literature
such as Klein (2002) and Bergstresser and Philippon (2006) to control for other firm
characteristics related to earnings management. Detailed definitions of all control variables
appear in Appendix 1. We control firm size (SIZE) because firm size is an important
determinant of earnings quality and an increase in firm size experiences increasing earnings
management (Becker et al., 1998; Chung et al., 2002; Chen et al., 2015). SIZE is the natural
logarithm of total assets. Leverage (LEV) and operating cash flows (CFO) are associated with
ARA Dependent variable 5 AUDFEE
30,1 (1) (2)
Variable Coe t-stat Coe t-stat

Intercept 5.649*** (14.770) 5.302*** (7.293)

INSCLAIM 0.015** (2.529) 0.018*** (3.000)
SIZE 0.380*** (17.975) 0.356*** (15.849)
110 CURRENT 0.171 (1.392) 0.112 (0.941)
INV 1.444*** (5.927) 1.575*** (6.587)
ROA 2.276*** (5.000) 1.741*** (3.455)
LOSS 0.001 (0.013) 0.002 (0.037)
OPINION 0.260*** (4.228) 0.312*** (5.457)
TENURE 0.018** (2.192) 0.030*** (3.916)
EXPERTISE 0.519** (2.440) 0.474** (2.114)
REC 0.123 (0.504) 0.075 (0.297)
LEV 0.483 (1.093) 0.348 (0.798)
Z-SCORE 0.001** (2.527) 0.001*** (3.012)
CATA 0.821*** (4.245) 0.948*** (4.886)
EXTRA 0.018** (2.406) 0.015* (1.836)
ARL 0.009 (0.314) 0.094 (0.995)
TOBINQ 0.202*** (7.053) 0.181*** (5.957)
HIGHTECH 0.076 (1.554) 0.044 (0.894)
QUARTER Fixed Effect No Yes
Observations 626 626
Adj.R2 0.710 0.726
Table 7. Note(s): ***, ** and * denote significance at the 1%, 5% and 10% level, respectively. Table 7 shows OLS
The impact of regression analysis of the impact of insurance claims of trade credit insurance (INSCLAIM) on audit fees
insurance claims on (AUDFEE). T-values are reported in parentheses with White adjusted standard errors at the firm level. Other
audit fees variables are defined in Appendix 1

the firms’ desire to manage earnings (Myers et al., 2003; Butler et al., 2004). We include
executive compensation (SALARY) that is the ratio of the sum of the top three executives’
compensation to total assets because executive compensation is one of the motivations of
earnings management (Shuto, 2007; Laux and Laux, 2009; Meek et al., 2007). We follow
Fairfield et al. (2003) to control business growth (GROWTH) defined as the growth rate of
operating income. Previous studies (e.g. Jaggi et al., 2009; Ye, 2014) find that controlling
shareholder ownership is inversely associated with earnings management, so we control the
sum of the shareholdings of the top five largest shareholders’ ownership concentration
(TOP5) in the model. Large audit firms (AUDITOR), firms with long history (AGE) and firms
with healthy growth (BTM) are associated with firm’s earnings quality (Butler et al., 2004;
Bergstresser and Philippon, 2006; Ye, 2014; Dou et al., 2016), so we include these variables in
our model.
We control for board size (BOARD) as Yermack (1996) suggests that small board size can
discipline management more effectively. BOARD is the total number of directors on a firm’s
board. We also include board independence (BDIND) because prior research suggests that
board independence can effectively curb earnings management (Klein, 2002; Jaggi et al., 2009;
Ye, 2014). High-tech industry (HIGHTECH) is an indicator variable equal to one if the firm
belongs to one of the following industries: pharmaceuticals, computers, electronics,
programming, R&D services and zero otherwise (Francis et al., 1994; Krishnan et al., 2011).
We also control quarterly fixed effect because our regressions are based on case-quarter
observations.
Table 8 presents regression results for Eq. (4). The dependent variables in Column (1) and
column (2) are the absolute values of discretionary accruals derived from the Jones (1991)
 Dependent variable 5 jDAj1 Dependent variable 5 jDAj2
(1) (2) (3) (4)
Variable Coe t-stat Coe t-stat Coe t-stat Coe t-stat

Intercept 0.127*** (3.370) 0.081** (2.024) 0.133*** (3.532) 0.086** (2.166)

INSCLAIM 0.001** (2.248) 0.001** (2.116) 0.001** (2.216) 0.001** (2.106)
SIZE 0.005*** (3.594) 0.004*** (2.753) 0.006*** (3.766) 0.005*** (3.004)
LEV 0.049*** (3.286) 0.049*** (3.305) 0.050*** (3.297) 0.050*** (3.322)
CFO 0.084** (2.042) 0.156*** (3.689) 0.090** (2.185) 0.161*** (3.824)
SALARY 6.017*** (4.886) 5.220*** (3.737) 6.327*** (5.156) 5.502*** (4.001)
GROWTH 0.007*** (3.938) 0.009* (1.708) 0.007*** (3.899) 0.009* (1.709)
TOP5 0.000 (0.766) 0.000 (0.584) 0.000 (0.761) 0.000 (0.577)
AUDITOR 0.018*** (3.960) 0.013*** (2.686) 0.018*** (4.084) 0.013*** (2.765)
BOARD 0.003*** (3.132) 0.003*** (3.382) 0.004*** (3.234) 0.003*** (3.518)
BDIND 0.019 (0.681) 0.002 (0.088) 0.019 (0.690) 0.003 (0.107)
AGE 0.000 (0.124) 0.001 (0.976) 0.000 (0.076) 0.001 (0.919)
BTM 0.003* (1.807) 0.004** (1.988) 0.003* (1.823) 0.004** (1.988)
HIGHTECH 0.031*** (7.120) 0.027*** (6.351) 0.031*** (7.164) 0.028*** (6.384)
QUARTER Fixed Effect No Yes No Yes
Observations 626 626 626 626
Adj.R2 0.197 0.334 0.204 0.339
Note(s): ***, **, and * denote significance at the 1%, 5%, and 10% level, respectively. Table 8 shows OLS regression analysis of the impact of insurance claims of trade
credit insurance (INSCLAIM) on earnings management (jDAj1 or jDAj2). T-values are reported in parentheses with White adjusted standard errors at the firm level. Other
variables are defined in Appendix 1
Insurance
audit quality

111
claims and

The impact of

earnings management
insurance claims on
Table 8.
ARA model. Column (3) and column (4) have discretionary accruals from modified Jones model.
30,1 Columns (1) and (3) investigate the association between insurance claim (INSCLAIM) and
earnings quality controlling firm characteristics. The coefficients on insurance claim
(INSCLAIM) are both positive and significant at the 5% level. We control for quarter fixed
effects in columns (2) and (4). The coefficients on insurance claim (INSCLAIM) are both
positive and significant. Our results suggest that the firms with higher insurance claims are
associated with lower audit quality.
112
6.6 Insurance claims and auditor selection
Audit market is fiercely competitive in China (Chen et al., 2010), and the market concentration
is not high (Chen et al., 2007, 2010). The Chinese audit market is characterized by monopolistic
competition, with clients dominating the mutual choice between client and auditor (Chen et al.,
2007). According to China’s Guidelines for Corporate Governance of Listed Companies (2002),
the power to select and replace auditors belongs to the Audit Committee of each firm.
However, the audit committees of Chinese firms do not actually play a role, and management
has the real power.
We next investigate whether firms with high insurance claims are more likely to select
local auditors. China provides an interesting setting to test auditor selection due to the
complexity of the relation-based economy (guanxi) in China (Liu et al., 2011). Table 7 presents
logit regressions with local auditor in period tþ1 (LOCALtþ1) as dependent variable. The
coefficient of the variable INSCLAIM in column (1) is 0.195 and statistically significant at the
1% level, indicating that firms with higher insurance claims of trade credit insurance are
more inclined to choose local auditors instead of Big 4 auditors. In column (2) of Table 9, we
add the quarter fixed effect. The coefficient on insurance claims (INSCLAIM) continues to be
positive and statistically significant at the 1% level. These results suggest that firms with
higher insurance claims are more likely to choose local auditors instead of Big 4 auditors with

Dependent variable 5 LOCAL

(1) (2)
Variable Coe t-stat Coe t-stat

Intercept 37.476*** (6.403) 33.653*** (4.089)

INSCLAIM 0.195*** (3.468) 0.208*** (3.366)
SIZE 1.537*** (6.641) 1.529*** (6.034)
LEV 1.291 (0.680) 1.868 (0.881)
ROA 35.966*** (5.277) 41.848*** (4.719)
REC 7.105*** (3.778) 5.607*** (2.830)
INV 2.852 (1.475) 2.557 (1.147)
GROWTH 0.222 (1.163) 1.759 (1.467)
SOE 2.094*** (3.438) 2.567*** (3.645)
EXPERTISE 14.410*** (6.298) 13.672*** (5.565)
Z-SCORE 0.183 (1.146) 0.083 (0.434)
HIGHTECH 3.639*** (2.656) 3.838** (2.522)
QUARTER Fixed Effect No Yes
Observations 626 626
Pseudo R2 0.430 0.475
Note(s): ***, **, and * denote significance at the 1%, 5% and 10% level, respectively. Table 7 shows logit
Table 9. regression analysis of the impact of insurance claims of trade credit insurance (INSCLAIM) on auditor selection
The impact of (LOCAL). The dependent variable is LOCAL that equals to 1 if the auditor is one of the non-Big 4 auditors, and
insurance claims on 0 otherwise. T-values are reported in parentheses with White adjusted standard errors at the firm level. Other
auditor choice variables are defined in Appendix 1
good reputation. In addition, the coefficient on SIZE is negative and significant in columns (1) Insurance
and (2), indicating that large firms are more likely to choose Big 4 auditors. The coefficient on claims and
ROA is negative and significant in columns (1) and (2), indicating that firms with low returns
are more likely to choose local auditors.
audit quality

7. Conclusion
In this paper, we empirically examine whether insurance claims from trade credit insurance 113
are related to audit quality. We find that the firms with high insurance claims are associated
with higher abnormal audit fees. Further, we discover evidence that firms with high
insurance claims have short audit report lags, pay higher audit fees, show low audit/earnings
quality and prefer to hire local auditors. These findings are consistent with agency theory of
individual audit partners. Since firms with high insurance claims are more likely to
experience unseen firm risk or unethical behaviors, they have stronger incentives to prevent
losses by undertaking opportunistic accounting methods. To ensure that our inference is not
complicated by the endogenous bias, we also undertake the propensity score matching test.
We verify that our main results are unaltered with alternative measures and an alternative
sample. Finally, we document that high insurance claim is possibly one of the determinants of
abnormal audit fees and audit report lags.
This study is of great significance in understanding the effect of trade credit insurance
claims on abnormal audit fees as well as how auditors maintain their independence and
enhance audit quality. The findings also provide helpful insights for investors on the social
connections between auditors and clients in China. Our results provide useful information to
regulators of trade credit insurance and auditor independence. We suggest that insured
companies may need to disclose insurance claim information in financial reports.

Notes
1. http://www.industryweek.com/cost-management-amp-bpm/trade-credit-insurance-competitive-
advantage-manufacturers
2. In this paper, accounts receivable means trade receivables that means the total amount owing to a
company for goods or services it has sold.
3. http://www.rmmagazine.com/2017/06/05/three-tips-for-avoiding-the-non-disclosure-defense-in-
trade-credit-insurance-claims/
4. http://documents.worldbank.org/curated/en/951681468164986978/pdf/625150NWP0Trad0
0Box0361486B0PUBLIC0.pdf
5. In our sample firms, we do find that auditors consider trade credit insurance claims as a risk factor
when conducting audit testing. For instance, in the audited annual financial report of Company Z, its
auditor states that “according to the notice from the insurance company, the company received
RMB X of subsidy funds during the reporting period which was directly recorded as the current
profit and loss.”
6. Detailed explanations of each step listed in Figure 1 are available upon request.
7. According to interviews with trade credit insurance business professionals, the trade credit
insurance business of Y insurance company (real name is available upon request) accounts for 80%
of the national trade credit insurance business. Taking Y insurance company business data as a
research sample is representative.
8. http://www.finaccord.com/uk/tables-of-contents_html/table-of-contents_trade-credit-insurance-in-
china.htm
9. Company A disclosed its accounts receivable information in its 2014 annual report. The balance of
the account Accounts Receivable – Company S was RMB 5,310,452.47 yuan. Because Company S
ARA filed for bankruptcy, Company A recorded the bad debt provision of Accounts Receivable –
Company S. According to the credit insurance contract signed between Company A and the
30,1 insurance company, the compensation ratio of the insurance company stipulated in the contract was
90%. Company A withdrew the bad debt provision at 10%. In 2015, Company A received RMB
1,316,075.24 from Company S. At the same time, according to the newly signed agency agreement
with the insurance company, the payment ratio was 75%, and the provision for bad debt was
recognized at 25%. As this case shows, credit insurance is indeed a way of managing receivable
114 accounts. (Due to the confidentiality agreement with the data provider, we cannot publicly disclose
the company’s name. However, the company information is available upon request.)
10. We obtained trade credit insurance data from an insurance company. The data is authorized only
for the purpose of academic research. Due to confidentiality signed with the insurance company, we
cannot disclose the name of insurance company. The data is available for editors if requested.
11. Our sample period is from 2011 to 2015 due to the trade credit insurance claim data availability. This
data is confidential by signing an agreement with an insurance company. We also hope that we
could extend the sample period after 2015, however, the insurance company replaced the data
system after 2015. We are not provided new access to data after 2015 by the previously signed
agreement. The data from 2009 to 2010 is not available either from this insurance company.
12. We select quarterly data as our sample since the listed companies vote for the audit firms before
December 31. In order to confirm that the company’s quarterly insurance claim affects the choice
between the listed company and the audit firm, we interviewed a partner in an audit firm and found
that audit firms were concerned about the company’s quarterly insurance claims before accepting
their clients.
13. According to the median of insurance claims and the median of abnormal audit fees, the samples
were divided into four groups: (1) groups with low insurance claims and low abnormal audit fees;
(2) groups with low insurance claims and high abnormal audit fees; (3) groups with high insurance
claims and low abnormal audit fees; and (4) groups with high insurance claims and high abnormal
audit fees. We measure earnings management in two methods. jDAj1 is the absolute value of the
discretionary accruals derived from the Jones (1991) model. jDAj2 is an earnings management
measure following the modified Jones model (Dechow et al., 1995). We performed the t-test on the
mean of the earnings management of Group (1) and Group (4) showing that the mean of jDAj1 (0.049)
of Group (4) was significantly higher than the mean of jDAj1 (0.040) of Group (1). In addition, the
mean of jDAj2 (0.049) of Group (4) was significantly higher than the mean of jDAj2 (0.040) of Group
(1). It seems that the group with high insurance claims and high abnormal audit fees is associated
with high earnings management.

References
Altman, E.I. (1968), “Financial ratios, discriminant analysis and the prediction of corporate
bankruptcy”, The Journal of Finance, Vol. 23 No. 4, pp. 589-609.
Asthana, S.C. and Boone, J.P. (2012), “Abnormal audit fee and audit quality”, Auditing: A Journal of
Practice and Theory, Vol. 31 No. 3, pp. 1-22.
Aswath, D. (2018), “Country risk: determinants, measures and implications - the 2018 edition”, SSRN
Electronic Journal.
Barnes, P. (2004), “The auditor’s going concern decision and Types I and II errors: the Coase Theorem,
transaction costs, bargaining power and attempts to mislead”, Journal of Accounting and Public
Policy, Vol. 23 No. 6, pp. 415-440.
Bazerman, M.H., Morgan, K.P. and Loewenstein, G.F. (1997), “The impossibility of auditor
independence”, MIT Sloan Management Review, Vol. 38, pp. 89-94.
Becker, C.L., DeFond, M.L., Jiambalvo, J. and Subramanyam, K.R. (1998), “The effect of audit quality
on earnings management”, Contemporary Accounting Research, Vol. 15 No. 1, pp. 1-24.
Bell, T.B., Landsman, W.R. and Shackelford, D.A. (2001), “Auditors’ perceived business risk and audit
fees: analysis and evidence”, Journal of Accounting Research, Vol. 39 No. 1, pp. 35-43.
Bergstresser, D. and Philippon, T. (2006), “CEO incentives and earnings management”, Journal of Insurance
Financial Economics, Vol. 80 No. 3, pp. 511-529.
claims and
Boyer, M.M. and Stern, L.H. (2012), “Is corporate governance risk valued? Evidence from directors’
and officers’ insurance”, Journal of Corporate Finance, Vol. 18 No. 2, pp. 349-372.
audit quality
Butler, M., Leone, A.J. and Willenborg, M. (2004), “An empirical analysis of auditor reporting and its
association with abnormal accruals”, Journal of Accounting and Economics, Vol. 37 No. 2,
pp. 139-165.
115
Chang, H., Guo, Y. and Mo, P. (2019), “Market competition, audit fee stickiness, and audit quality:
evidence from China”, Auditing: A Journal of Practice and Theory, Vol. 38 No. 2, pp. 79-99.
Chen, C.J., Su, X. and Wu, X. (2007), “Market competitiveness and Big 5 pricing: evidence from China’s
binary market”, The International Journal of Accounting, Vol. 42 No. 1, pp. 1-24.
Chen, S., Sun, S.Y. and Wu, D. (2010), “Client importance, institutional improvements, and audit
quality in China: an office and individual auditor level analysis”, The Accounting Review,
Vol. 85 No. 1, pp. 127-158.
Chen, X., Cheng, Q. and Wang, X. (2015), “Does increased board independence reduce earnings
management? Evidence from recent regulatory reforms”, Review of Accounting Studies, Vol. 20
No. 2, pp. 899-933.
Choi, J.H., Kim, J.B. and Zang, Y. (2010), “Do abnormally high audit fees impair audit quality?”,
Auditing: A Journal of Practice and Theory, Vol. 29 No. 2, pp. 115-140.
Chung, R., Firth, M. and Kim, J.B. (2002), “Institutional monitoring and opportunistic earnings
management”, Journal of Corporate Finance, Vol. 8 No. 1, pp. 29-48.
Core, J.E. (2000), “The directors’ and officers’ insurance premium: an outside assessment of the quality of
corporate governance”, Journal of Law, Economics, and Organization, Vol. 16 No. 2, pp. 449-477.
Cummins, J.D. and Tennyson, S. (1996), “Moral hazard in insurance claiming: evidence from
automobile insurance”, Journal of Risk and Uncertainty, Vol. 12 No. 1, pp. 29-50.
DeAngelo, L.E. (1981), “Auditor independence, ‘low balling,’ and disclosure regulation”, Journal of
Accounting and Economics, Vol. 3 No. 2, pp. 113-127.
Dechow, P.M., Sloan, R.G. and Sweeney, A.P. (1995), “Detecting earnings management”, The
Accounting Review, pp. 193-225.
Dou, Y., Khan, M. and Zou, Y. (2016), “Labor unemployment insurance and earnings management”,
Journal of Accounting and Economics, Vol. 61 No. 1, pp. 166-184.
Elliott, J.A., Ghosh, A. and Peltier, E. (2013), “Pricing of risky initial audit engagements”, Auditing: A
Journal of Practice and Theory, Vol. 32 No. 4, pp. 25-43.
Eshleman, J.D. and Guo, P. (2014), “Abnormal audit fees and audit quality: the importance of
considering managerial incentives in tests of earnings management”, Auditing: A Journal of
Practice and Theory, Vol. 33 No. 1, pp. 117-138.
Fairfield, P.M., Whisenant, J.S. and Yohn, T.L. (2003), “Accrued earnings and growth: implications for
future profitability and market mispricing”, The Accounting Review, Vol. 78 No. 1, pp. 353-371.
Francis, J., Philbrick, D. and Schipper, K. (1994), “Shareholder litigation and corporate disclosures”,
Journal of Accounting Research, Vol. 32 No. 2, pp. 137-164.
Ghosh, A. and Lustgarten, S. (2006), “Pricing of initial audit engagements by large and small audit
firms”, Contemporary Accounting Research, Vol. 23 No. 2, pp. 333-368.
Ghosh, A.A. and Tang, C.Y. (2015), “Assessing financial reporting quality of family firms: the
auditors’ perspective”, Journal of Accounting and Economics, Vol. 60 No. 1, pp. 95-116.
Gul, F.A., Chen, C.J. and Tsui, J.S. (2003), “Discretionary accounting accruals, managers’ incentives,
and audit fees”, Contemporary Accounting Research, Vol. 20 No. 3, pp. 441-464.
Habib, A. and Bhuiyan, M.B. (2011), “Audit firm industry specialization and the audit report lag”,
Journal of International Accounting Auditing and Taxation, Vol. 20 No. 1, pp. 32-44.
ARA Hogan, C.E. and Wilkins, M.S. (2008), “Evidence on the audit risk model: do auditors increase audit
fees in the presence of internal control deficiencies?”, Contemporary Accounting Research,
30,1 Vol. 25 No. 1, pp. 219-242.
Houston, R.W., Peters, M.F. and Pratt, J.H. (1999), “The audit risk model, business risk and audit-
planning decisions”, The Accounting Review, Vol. 74 No. 3, pp. 281-298.
Huang, T.C., Chang, H. and Chiou, J.R. (2016), “Audit market concentration, audit fees, and audit quality:
evidence from China”, Auditing: A Journal of Practice and Theory, Vol. 35 No. 2, pp. 121-145.
116
Jaggi, B., Leung, S. and Gul, F. (2009), “Family control, board independence and earnings
management: evidence based on Hong Kong firms”, Journal of Accounting and Public Policy,
Vol. 28 No. 4, pp. 281-300.
Johnstone, K.M. and Bedard, J.C. (2003), “Risk management in client acceptance decisions”, The
Accounting Review, Vol. 78 No. 4, pp. 1003-1025.
Johnstone, K.M. and Bedard, J.C. (2004), “Audit firm portfolio management decisions”, Journal of
Accounting Research, Vol. 42 No. 4, pp. 659-690.
Johnstone, K.M. (2000), “Client-acceptance decisions: simultaneous effects of client business risk, audit
risk, auditor business risk, and risk adaptation”, Auditing: A Journal of Practice and Theory,
Vol. 19 No. 1, pp. 1-25.
Jones, F.L. and Raghunandan, K. (1998), “Client risk and recent changes in the market for audit
services”, Journal of Accounting and Public Policy, Vol. 17 No. 2, pp. 169-181.
Jones, J.J. (1991), “Earnings management during import relief investigations”, Journal of Accounting
Research, Vol. 29 No. 2, pp. 193-228.
Jones, P.M. (2010), Trade Credit Insurance, Primer Series on Insurance, Issue 15, World Bank,
Washington, DC.
ard, K. and Sutedjo, S. (2019), “Auditor rotations and audit
Kalanjati, D.S., Nasution, D., Jonnerg
quality: a perspective from cumulative number of audit partner and audit firm rotations”, Asian
Review of Accounting, Vol. 27 No. 4, pp. 639-660.
Kinney, W.R. and Libby, R. (2002), “Discussion of the relation between auditors’ fees for nonaudit
services and earnings management”, The Accounting Review, Vol. 77 Nos s-1, pp. 107-114.
Klein, A. (2002), “Audit committee, board of director characteristics, and earnings management”,
Journal of Accounting and Economics, Vol. 33 No. 3, pp. 375-400.
Knechel, W.R. and Payne, J.L. (2001), “Additional evidence on audit report lag”, Auditing: A Journal of
Practice and Theory, Vol. 20 No. 1, pp. 137-146.
Knechel, W.R. and Sharma, D.S. (2012), “Auditor-provided nonaudit services and audit effectiveness
and efficiency: evidence from pre- and post-sox audit report lags”, Auditing: A Journal of
Practice and Theory, Vol. 31 No. 4, pp. 85-114.
Krishnan, J., Wen, Y. and Zhao, W. (2011), “Legal expertise on corporate audit committees and
financial reporting quality”, The Accounting Review, Vol. 86 No. 6, pp. 2099-2130.
Krishnan, G.V. (2003), “Does Big 6 auditor industry expertise constrain earnings management?”,
Accounting Horizons, Vol. 17, pp. 1-16.
Laux, C. and Laux, V. (2009), “Board committees, CEO compensation, and earnings management”, The
Accounting Review, Vol. 84 No. 3, pp. 869-891.
Liu, X. and Simunic, D.A. (2005), “Profit sharing in an auditing oligopoly”, The Accounting Review,
Vol. 80 No. 2, pp. 677-702.
Liu, J., Wang, Y. and Wu, L. (2011), “The effect of guanxi on audit quality in China”, Journal of
Business Ethics, Vol. 103 No. 4, p. 621.
Meek, G.K., Rao, R.P. and Skousen, C.J. (2007), “Evidence on factors affecting the relationship between
CEO stock option compensation and earnings management”, Review of Accounting and Finance,
Vol. 6 No. 3, pp. 304-323.
Mian, S.L. and Smith, C.W. (1992), “Accounts receivable management policy: theory and evidence”, Insurance
The Journal of Finance, Vol. 47 No. 1, pp. 169-200.
claims and
Miyazaki, A.D. (2009), “Perceived ethicality of insurance claim fraud: do higher deductibles lead to
lower ethical standards?”, Journal of Business Ethics, Vol. 87 No. 4, pp. 589-598.
audit quality
Myers, J.N., Myers, L.A. and Omer, T.C. (2003), “Exploring the term of the auditor-client relationship
and the quality of earnings: a case for mandatory auditor rotation”, The Accounting Review,
Vol. 78 No. 3, pp. 779-799.
117
Semba, H. and Kato, R. (2019), “Does Big N matter for audit quality? Evidence from Japan”, Asian
Review of Accounting, Vol. 27 No. 1, pp. 2-18.
Sharma, D.S., Tanyi, P.N. and Litt, B.A. (2017), “Costs of mandatory periodic audit partner rotation:
evidence from audit fees and audit timeliness”, Auditing: A Journal of Practice and Theory,
Vol. 36 No. 1, pp. 129-149.
Shuto, A. (2007), “Executive compensation and earnings management: empirical evidence from
Japan”, Journal of International Accounting, Auditing and Taxation, Vol. 16 No. 1, pp. 1-26.
Simunic, D.A. (1980), “The pricing of audit services: theory and evidence”, Journal of Accounting
Research, Vol. 18 No. 1, pp. 161-190.
Trompeter, G. (1994), “The effect of partner compensation schemes and generally accepted accounting
principles on audit partner judgment”, Auditing: Journal of Practice and Theory, Vol. 13 No. 2,
pp. 56-69.
Venkataraman, R., Weber, J.P. and Willenborg, M. (2008), “Litigation risk, audit quality, and audit
fees: evidence from initial public offerings”, The Accounting Review, Vol. 83 No. 5,
pp. 1315-1345.
Wang, Y.C., Huang, H.W., Chiou, J.R. and Huang, Y.C. (2017), “The effects of industry expertise on cost
of debt: an individual auditor-level analysis”, Asian Review of Accounting, Vol. 25 No. 3,
pp. 322-334.
Warren, D.E. and Schweitzer, M.E. (2018), “When lying does not pay: how experts detect insurance
fraud”, Journal of Business Ethics, Vol. 150 No. 3, pp. 711-726.
Whisenant, S., Sankaraguruswamy, S. and Raghunandan, K. (2003), “Evidence on the joint determination
of audit and non-audit fees”, Journal of Accounting Research, Vol. 41 No. 4, pp. 721-744.
Xie, Z., Cai, C. and Ye, J. (2010), “Abnormal audit fees and audit opinion–further evidence from China’s
capital market”, China Journal of Accounting Research, Vol. 3, pp. 51-70.
Ye, K. (2014), “Independent director cash compensation and earnings management”, Journal of
Accounting and Public Policy, Vol. 33 No. 4, pp. 391-400.
Yermack, D. (1996), “Higher market valuation of companies with a small board of directors”, Journal
of Financial Economics, Vol. 40 No. 2, pp. 185-211.
Zmijewski, M.E. (1984), “Methodological issues related to the estimation of financial distress
prediction models”, Journal of Accounting Research, Vol. 22, pp. 59-82.

Further reading
Blankley, A.I., Hurtt, D.N. and MacGregor, J.E. (2012), “Abnormal audit fees and restatements”,
Auditing: A Journal of Practice and Theory, Vol. 31 No. 1, pp. 79-96.
Du, N., Ronen, J. and Ye, J. (2015), “Auditors’ role in China: the joint effects of Guanxi and regulatory
sanctions on earnings management”, Journal of Accounting, Auditing and Finance, Vol. 30
No. 4, pp. 461-483.

Corresponding author
Lijuan Yan can be contacted at: lijuanyan_ruc@163.com
 30,1

118
ARA

Table A1.
Variable Definition

ABFEE The residuals of the audit pricing model:

lnAUDFEEi,t 5 λ0þλ1SIZEi,tþλ2CURRENTi,tþλ3INVi,tþλ4ROAi,tþλ5LOSSi,tþλ6OPINIONi,tþλ P7TENUREi,tþλ8EXPERTISEi,t
Appendix 1

þλ9RECi,tþλ10LEVi,tþλ11Z-SCOREi,tþλ12CATAi,tþλ13EXTRAi,tþλ14TOBINQi,tþλ15ARLi,tþ YEARþεit
EXTRA is the non-operating income divided by the absolute value of net income; TOBINQ is the market-to-book ratio. Other
variables are defined in Appendix 1
INSCLAIM Quantile ranking from 1 to 10 according to the ratio of reported losses to credit limit at the case-quarter level
INSCLAIM_FIRM Quantile ranking from 1 to 10 according to the ratio of total reported loss to total credit limit at the firm-quarter level if the firm
has insurance claims, and 0 if the firm does not have insurance claims
CLAIM_DUMMY An indicator variable equals to 1 when the firm files insurance claims on trade losses to the insurance company, and 0 otherwise
SIZE Natural logarithm of total assets
CURRENT The ratio of current assets to current liabilities
INV The ratio of inventory to total assets
ROA The ratio of net income to total assets
LOSS An indicator variable that equals to 1 when net income is negative, and 0 otherwise
OPINION An indicator variable that equals to 1 when the auditor issues an unqualified opinion, and 0 otherwise
TENURE The number of years that the auditor has been engaged in the firm
J
,
EXPERTISE P K P J
Estimated auditor portfolio shares according to Krishnan (2003): IPSik ¼ REVikj P
j¼1
REVikj
k¼1 j¼1
The numerator is the sum of the sales of all clients of audit firm i in industry k. The denominator is the sales of all clients of
audit firm i summed over all k industries
AUDITOR A dummy variable that equals to 1 if the auditor is one of the Big 4 firms, and 0 otherwise
LEV The ratio of total liabilities to total assets
CATA The ratio of current assets to total assets
GROWTH The growth rate of operating income
AUDCHANGE A dummy variable that equals to 1 if the company changes its auditor and 0 otherwise
BTM The ratio of book value of total assets to market value of the firm
REC The ratio of accounts receivable to total assets

Variable Definition

PEACE Global peace index scores according to Aswath (2018)

PEACE_AVG The global peace index scores at the firm-quarter level, which refers to the average global peace index score the company faces
over the same period of time

(continued )
Variable Definition

HIGHTECH An indicator variable that equals to 1 if the firm belongs to one of the following industries: pharmaceuticals, computers,
electronics, programming, and R&D services, and 0 otherwise (Francis et al., 1994; Krishnan et al., 2011)
ZFC Company bankruptcy index, ZFC 5 4.336 – 4.513 3 ROA þ 5.679 3 LEV þ 0.004 3 CURRENT as in Zmijewski (1984)
IC Internal control index, which is obtained from Chinese internal control database, Internal Control and Risk Management
Database
BOARD The number of directors on a firm’s board
BDIND Ratio of the number of independent directors to the number of all directors
FOREIGN Ratio of overseas business income to total operating income
ARL The logarithm of audit report lag calculated as the number of days from fiscal-year end to the date of issuance of audit reports
as in Chang et al. (2019)
DUAL An indicator variable that equals 1 if a firm’s CEO also serves as the chair of the board and 0 otherwise
AUDFEE The amount of the firm’s total audit fees
jDAj1 Earnings management is the residual absolute value of Jones model according to Jones (1991)
jDAj2 Earnings management is the residual absolute value of the modified Jones model according to (Dechow et al., 1995)
AGE The number of years since the establishment of the company
TOP5 Sum of shareholding ratios of the company’s top five shareholders
SALARY Ratio of total compensation of top three executives to total assets
CFO Ratio of net cash flow from operating activities to total assets
LOCAL A dummy variable that equals to 1 if the auditor is one of the non-Big 4 auditors, and 0 otherwise
SOE An indicator variable that equals to 1 if a firm’s major shareholder is the government, and 0 otherwise
Z-SCORE A firm’s financial health defined the same as in Altman (1968), Z-SCORE 5 0.012
(working capital/total assets) þ 0.014(retained earnings/total assets) þ 0.033
(earnings before interest and taxes/total assets) þ 0.006(market value equity/book value of total debt) þ 0.999(sales/total
assets)
Insurance
audit quality

119
claims and

Table A1.
ARA Appendix 2
30,1
Panel A Descriptive statistics of the annual industry assets and operating income of sample firms (in millions
RMB)
Assets Operating income
Industry Number of firms Mean Median Mean Median
120 Mining 1 1,330,000 1,330,000 2,600,000 2,600,000
Manufacturing 53 20,400 7,610 16,700 6,320
Construction 4 29,800 11,500 19,900 6,920
Wholesale and Retail 10 14,600 10,400 27,300 9,270
Total Sample 68 39,400 9,800 56,500 7,970

Panel B Sample distribution by year and industry

Industry 2011 2012 2013 2014 2015 Total

Mining 0 0 0 0 9 9
Manufacturing 45 61 86 57 130 379
Construction 0 6 1 7 10 24
Wholesale and Retail 13 23 26 51 101 214
Total 58 90 113 115 250 626
Note(s): Appendix 2 reports the sample firms from four industries: manufacturing, wholesale and retail,
Table A2. construction and mining. Panel A of Appendix 2 shows that most of the sample firms are manufacturing
Industry distribution companies. Panel B of Appendix 2 reports sample distribution by year and industry. The number of firms in
of the Sample our sample has been increasing from 2011 to 2015

Appendix 3

Panel A The importance of credit limits

Variable N Mean Q1 Median Q3 S.D.

Limit/Asset 626 0.359% 0.038% 0.107% 0.512% 0.005

Limit/REV 626 0.951% 0.061% 0.230% 1.103% 0.014
Limit/Income 626 16.723% 1.683% 3.763% 23.161% 0.372

Panel B The distribution of company credit limits

Limit/Asset >0.5% >1% >3% >5% >10%

n 159 98 34 32 21
n/N 25.399% 15.655% 5.431% 5.112% 3.355%
Limit/REV >0.5% >1% >3% >5% >10%
n 248 164 81 56 33
n/N 39.617% 26.198% 12.939% 8.946% 5.272%
Limit/Income >0.5% >1% >3% >5% >10%
n 401 372 322 295 240
n/N 64.058% 59.425% 51.438% 47.125% 38.339%
Note(s): Appendix 3 investigates the importance of credit limit. Panel A reports the distribution of credit limit.
For example, in Panel A, the average values of the ratio of limit to total assets (Limit/Asset), the ratio of limit to
operating revenues (Limit/REV) and the ratio of limit to operating income (Limit/Income) are 0.359%, 0.951%
and 16.723%, respectively. Panel B shows that 98 sample firms have the ratio of limit to total assets (Limit/
Asset) greater than 1%, accounting for 15.655% of the sample. Furthermore, 81 sample firms have the ratio of
credit limit to operating revenues (Limit/REV) greater than 3%, accounting for 12.939% of the sample. Finally,
Table A3. 295 sample firms have the ratio of credit limit to operating income (Limit/Income) greater than 5%, accounting
The importance of for 47.12% of the sample. The results provide evidence that credit limit is very important for the insured
credit limits company as well as for insurers’ risk compensation