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suppliers would imply lower audit complexity, reducing audit efforts and thus, leading to
lower audit fees. They further argue that the audit quality is not impaired even though
lower audit fees are charged on firms with customer concentration. They find that
suppliers who share the same auditor with at least one of their major customers enjoy
additional audit fee discounts, and these suppliers are less likely to experience
restatements, suggesting a positive link between audit quality and major customer
dependency. Chen, Chang, Chen, and Kim (2014) further find that audit fees are
negatively associated with the major buyer-related supply chain knowledge. They show
that auditors with more knowledge of supply chain provide more discounts on audit fees
to their clients when the major customer is also the auditor’s client. They argue that for
audit firms that have engaged the client’s supply chain partners, these audit firms have
better understanding of the client’s industry. The audit firms are expected to better
evaluate the client’s key accounting figures since these numbers are close linked to those
of the client’s major customer, resulting in higher audit quality, therefore the auditor can
command fee premium.
2.3.2 Stock Market Perceptive
Many studies have documented evidences on the market reactions to the information
along the supply chain. Olsen and Dietrich (1985) give the first evidence that information
disclosures made by retailers may affect the security prices of supplier firms. They find
that suppliers with a relatively larger proportion of sales to a specific retailer show a
relatively larger change in price after the retailer’s monthly sales announcement. They
argue that investors may revise their expectation of the sales level of supplier firms after
the announcement, and that provide us evidence on vertical information transfers between
customers and suppliers.
Pandit et al. (2011) provide further evidence that the degree of transfer of a
customer’s quarterly earnings announcement to suppliers’ security returns is positively
related to the strength of the economic bond between the suppliers and customers,
seasonal changes in the customer revenue and cost of goods sold, the level of
macroeconomic uncertainty, and the informativeness of the announcement. They contend
that for suppliers that sell large portion of sales to a major customer, information provided
by customer’s earning announcement can alter investors’ expectation about the supplier’s
cash flows and future earnings. Guan, Wong, and Zhang (2015) show that analysts who
follow a covered firm’s customer will more accurately forecast the supplier firm’s earning
than those who do not. They also find that although both types of analysts respond to