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

57 Pages Posted: 2 Jun 2016  

Dan S. Dhaliwal

University of Arizona - Department of Accounting

Jaideep Shenoy

University of Connecticut

Ryan Williams

University of Arizona - Department of Finance

Multiple version iconThere are 2 versions of this paper

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

Dan S. Dhaliwal

University of Arizona - Department of Accounting ( email )

McClelland Hall
PO Box 210108
Tucson, AZ 85721
United States

Jaideep Shenoy

University of Connecticut ( email )

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

Ryan Williams (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

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