Common Auditors and Relationship Specific Investment in Supplier Customer Relationships
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.