Common Auditors and Relationship-Specific Investment in Supplier-Customer Relationships

57 Pages Posted: 2 Jun 2016

See all articles by Dan S. Dhaliwal

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Jaideep Shenoy

University of Connecticut - Department of Finance

Ryan Williams

Université Paris-Dauphine, PSL Research University; Enoda

Date Written: May 2016

Abstract

Using a sample of key supplier-customer relationships, we investigate whether an auditor common to a supplier and customer firm reduces information asymmetry between the two parties, leading to an increase in relationship-specific investments. We find evidence that the presence of a common auditor is positively related to relationship-specific investments. In addition, we show that industry structure and financial constraints play a role in explaining this relation. Finally, we use Arthur Andersen’s failure as an exogenous shock to the information environment and show that supplier-customer pairs that shared Andersen prior to its failure are more likely to share an auditor post-failure. Moreover, this higher propensity to share an auditor post-failure is prevalent only in sub-sample of firms where relationship-specific investments are important. Overall, we demonstrate that common auditors in supplier-customer relationships reduce information asymmetry in the supply chain and mitigate the investment inefficiency in relationship-specific assets.

Keywords: Supplier-customer relationships, relationship-specific investments, common auditor, information asymmetry

JEL Classification: M4, L00, L14, L22

Suggested Citation

Dhaliwal, Dan S. and Shenoy, Jaideep and Williams, Ryan, Common Auditors and Relationship-Specific Investment in Supplier-Customer Relationships (May 2016). Available at SSRN: https://ssrn.com/abstract=2787245 or http://dx.doi.org/10.2139/ssrn.2787245

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Jaideep Shenoy

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

Ryan Williams (Contact Author)

Université Paris-Dauphine, PSL Research University ( email )

Place du Maréchal de Lattre de Tassigny
Paris, 75016
France

Enoda ( email )

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
556
Abstract Views
2,855
Rank
28,517
PlumX Metrics