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The effect of framing and negotiation partner's objective on judgments about negotiated transfer prices

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  • Chang, Linda
  • Cheng, Mandy
  • Trotman, Ken T.
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    Abstract

    A common approach to set transfer prices is via intra-firm negotiation. However, Luft and Libby [Luft, J. L., & Libby, R. (1997). Profit comparisons, market prices and managers' judgments about negotiated transfer prices. The Accounting Review, 72(2), 217-229] found that because of the existence of self-serving biases, negotiating managers have different expectations regarding what constitutes a 'fair' transfer price, leading to a less efficient negotiation process. In this study, we examine two factors that are expected to affect managers' transfer price negotiation judgments, namely, framing as a gain or as a loss and the negotiation partner's objective (whether the partner's objective involves high or low concern-for-others). We propose that these two factors affect managers' perceptions of the negotiation context, and thus the way they interpret the economic and social consequences of accounting information. Our results show that a loss frame (compared to a gain frame) exacerbates managers' self-serving biases and increases the 'transfer price expectation gap' between buyers and sellers. Further, in our experiment where market price is higher than equal-profit price, we find that managers' transfer price expectations are lower (and deviate more from the prevailing market price) when they are negotiating with a partner with high concern-for-others than with a partner with low concern-for-others. We discuss the broader implications of these results for the design of management accounting systems.

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    Bibliographic Info

    Article provided by Elsevier in its journal Accounting, Organizations and Society.

    Volume (Year): 33 (2008)
    Issue (Month): 7-8 ()
    Pages: 704-717

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    Handle: RePEc:eee:aosoci:v:33:y:2008:i:7-8:p:704-717

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    Web page: http://www.elsevier.com/locate/aos

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    References

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    14. Bottom, William P. & Studt, Amy, 1993. "Framing Effects and the Distributive Aspect of Integrative Bargaining," Organizational Behavior and Human Decision Processes, Elsevier, Elsevier, vol. 56(3), pages 459-474, December.
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