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

Ryan Williams

University of Arizona - Department of Finance

Date Written: July 2017

Abstract

Theory suggests that information asymmetry between supplier and customer firms exacerbates the holdup problem. We investigate if an auditor common to the supplier and customer firm improves information flows leading to reduction in the holdup problem. Consistent with this notion, we find that shared auditors enhance relationship-specific investments in supplier-customer relationships. This positive relation is more pronounced in product market environments more prone to holdup problems between suppliers and customers are more prevalent. In contrast, we document no relation in a placebo sample of randomly matched supplier-customer pairs, supporting a causal linkage. Finally, we Arthur Andersen’s failure as an exogenous shock to show that supplier-customer pairs that shared Andersen prior to its failure are more likely to share an auditor post-failure in environments where relationship-specific investments are important. Overall, we demonstrate that common auditors 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 (July 2017). Available at SSRN: https://ssrn.com/abstract=3003435

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Jaideep Shenoy (Contact Author)

University of Connecticut ( email )

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

Ryan Williams

University of Arizona - Department of Finance ( email )

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

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