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Abstract
A common approach to set transfer prices is via intra-rm negotiation. However, Luft and Libby [Luft, J. L., &
Libby, R. (1997). Prot comparisons, market prices and managers judgments about negotiated transfer prices. The
Accounting Review, 72(2), 217229] found that because of the existence of self-serving biases, negotiating managers have
dierent expectations regarding what constitutes a fair transfer price, leading to a less ecient negotiation process. In
this study, we examine two factors that are expected to aect managers transfer price negotiation judgments, namely,
framing as a gain or as a loss and the negotiation partners objective (whether the partners objective involves high or
low concern-for-others). We propose that these two factors aect 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-prot price,
we nd 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.
Crown Copyright 2008 Published by Elsevier Ltd. All rights reserved.
Introduction
Negotiation is a common method used by rms
to set transfer prices (Ghosh, 2000). Even where an
external market exists, transfer price negotiation is
0361-3682/$ - see front matter Crown Copyright 2008 Published by Elsevier Ltd. All rights reserved.
doi:10.1016/j.aos.2008.01.002
705
706
3
In this study, we use an example where market price is
above the equal-prot price and therefore concern-for-others
results in transfer prices below market prices. We note that
direction of the dierence between market price and transfer
price would reverse if the market price given in an experiment
was lower than the equal-prot price.
707
708
5
While the major emphasis in the framing literature has
centred on the standard risky choice framing aect introduced
by Kahneman and Tversky (1979) and Tversky and Kahneman
(1981), Levin et al. (1998) developed a typology to distinguish
between risky choice framing, attribute framing and goal
framing. Levin, Schneider, and Gaeth (1998) suggest that the
dierent operational denitions of framing have eects that rely
on dierent psychological processes.
709
710
of concern-for-others involves providing participants with a memo from their negotiation partner.
In the low concern-for-others treatment, the memo
includes references to maximising prot of my
division which also communicates to the other
party that this is accepted practice in this organisation. In contrast, in the high concern-for-others
treatment, the culture encourages both divisions
to receive satisfactory prots and therefore both
parties would expect a lower price.
H3: Managers estimated transfer prices are
lower when they are negotiating with a partner
with high concern-for-others than when they
are negotiating with a partner with low concern-for-others.
Research methods
Research design
A controlled laboratory experiment was conducted to test the proposed hypotheses, using a
2 2 2 between-subjects design. The three independent variables were the negotiating managers
role (participants acting as either a buyer or a
seller), goal frame (gain frame or loss frame) and
the negotiation partners objective (high or low
concern-for-others).
then sold to an external customer. As the two divisions are autonomous, both divisional managers
are free to negotiate a mutually acceptable transfer
price or to trade externally at the prevailing market price (which was set at $70 per unit).9 The cost
structures of the two divisions were designed such
that the equal-prot price was $50.10 Included in
the task was a prot schedule illustrating the prot
implications of a range of transfer prices for both
parties (between $20 where the prot for sellers
was zero, and $80 per unit, where the prot for
buyers was zero). Both buyers and sellers were
then asked to predict the nal negotiated transfer
price and the sellers reservation price.
Independent variables
The negotiation role was manipulated by randomly assigning participants either to the role of
Parts Manager (i.e. seller) or Assembly Manager (i.e. buyer). The goal frame was operationalised by framing the instructions provided in the
instrument either as a gain frame or a loss frame.
Specically, instructions provided to Assembly
managers (the buyers) assigned a gain frame were
as follows:
As you can see from the table, for every $5
decrease in transfer price you stand to gain
$5000 prot. For example, by negotiating a
transfer price of $55, your prot is $25,000.
But if you negotiate a lower transfer price,
say, $50, your prot is $30,000, which means
that you have gained $5000 prot. In other
words, as you settle for a lower transfer
price, you stand to gain prot for your division in $5000 increments.
Experimental task
The experimental task was modied8 from Luft
and Libbys (1997) instrument, where participants
assumed the role of a manager who is responsible
for negotiating a transfer price of component
Parts. Parts are components sold by the Parts
Division to the Assembly Division, which can then
be processed further by the Assembly Division and
9
711
80 75 70 65 60 55 50 45 40 35 30 25 20
60 55 50 45 40 35 30 25 20 15 10
10 15 20 25 30 35 40 45 50 55 60
20 25 30 35 40 45 50 55 60 65 70 75 80
60 55 50 45 40 35 30 25 20 15 10
10 15 20 25 30 35 40 45 50 55 60
5
Dependent variables
We measured the dependent variable, managers estimated negotiation prices, by asking participants to predict the nal transfer price of the
negotiation process. In addition, participants were
also asked to indicate the expected lowest price
that sellers would likely to be willing to accept
11
Luft and Libby (1997) pointed out that negotiated transfer
price is a more sensitive measure of potential conict, while
reservation price is more sensitive to managers mistaken
judgments about their negotiation partner. As we are primarily
interested in the former (i.e. the eect of managers perception
on their expectations of how the negotiation conict would be
resolved), our primary analysis will focus on estimated nal
transfer prices.
Participants
One hundred and twenty-eight participants volunteered to participate in this experiment. All participants were enrolled in a Master of Commerce
degree or Master of Business Technology at one
Australian university, and each had at least two
years of full time work experience. However, 32
participants failed one or more post-experiment
manipulation tests and were later excluded from
the analysis, resulting in 96 usable responses. The
cell sizes for each of the eight treatment group varied between 11 and 15 (see Table 1).
Manipulation check and post-test measures
After participants completed the negotiation
task, they were given three manipulation checks.
The rst asked participants to indicate what role
they played in the negotiation (i.e. whether they
712
Table 1
Means (standard deviation) of estimated nal transfer price ($)
Partners objective
Frame total
High concern-for-others
Sellers
Buyers
Column total
Total
Low concern-for-others
Gain frame
Loss frame
Total
Gain frame
Loss frame
Total
Gain frame
Loss frame
58.64
(7.10)
n = 11
57.69
(8.32)
n = 13
58.13
(7.63)
n = 24
61.92
(8.04)
n = 13
52.73
(10.57)
n = 11
57.71
(10.21)
n = 24
60.42
(7.65)
n = 24
55.42
(9.55)
n = 24
57.92
(8.92)
n = 48
62.50
(9.50)
n = 10
60.30
(7.51)
n = 10
61.40
(8.41)
n = 20
65.50
(6.96)
n = 15
56.92
(10.52)
n = 13
61.52
(9.56)
n = 28
64.30
(7.89)
n = 25
58.39
(9.29)
n = 23
61.47
(9.01)
n = 48
60.48
(8.35)
n = 21
58.83
(7.91)
n = 23
59.61
(8.01)
n = 44
63.84
(7.44)
n = 28
55.00
(10.53)
n = 24
59.76
(9.95)
n = 52
62.40
(7.93)
n = 49
56.87
(9.44)
n = 47
59.69
(9.09)
n = 96
Table 2
ANOVA model for estimated transfer price H1 and H2
Negotiators role
Partners objective
Frame
Role * objective
Role * Frame
Objective * frame
Role * objective * frame
Error
DF
MS
1
1
1
1
1
1
1
88
644.11
298.70
6.22
0.60
315.05
2.49
5.16
73.93
8.71
4.04
0.08
0.01
4.26
0.03
0.07
0.00a
0.02
0.39
0.46
0.02b
0.43
0.40
713
Table 3 Panel A indicates that on average sellers reservation price was $54.04, which was higher
than the equal-prot price of $50.00 (signicant
with one-sample t-test, t = 2.464, p = 0.01). This
is consistent with our expectation that sellers in
general would not consider the equal-prot price
as a fair outcome of negotiation. Instead, their
minimum acceptable price was signicantly higher.
Table 3 (Panel A) also shows that compared to
their gain frame counterparts, sellers in the loss
frame condition reported a higher reservation
price ($56.54 vs. $50.71). The main eect for goal
frame in the ANOVA reported in Table 3 Panel
B shows that this dierence is statistically signicant (F = 6.33, p = 0.02). Consistent with our earlier argument, this nding suggests that a loss
frame focuses individuals on a goal of avoiding
negative consequences, thus increasing their resistance point to an unfavourable transfer price,
which results in a higher expected reservation
price. Neither negotiation partners objective
(F = 0.01, p = 0.94) or the interaction with framing (F = 1.06, p = 0.31) are signicant for reservation price.
Table 4 reports the descriptive statistics and
ANOVA results for the sellers price premium. A
Table 3
Additional analysis sellers reservation prices
Partner exhibits high concern-for-others
Panel A: Means (standard deviation) of sellers reservation prices
Gain frame
52.27
(7.20)
n = 11
Loss frame
56.15
(8.20)
n = 13
Total
54.38
(7.85)
n = 24
DF
Total
49.00
(16.13)
n = 10
56.87
(12.51)
n = 15
53.72
(14.29)
n = 25
50.71
(12.07)
n = 21
56.54
(10.55)
n = 28
54.04
(11.48)
n = 49
MS
0.01
6.33
1.06
0.94
0.02
0.31
a
Two outliers were excluded from this analysis. One outlier was excluded because the subject reported a reservation price that was
higher than the expected transfer price. A second outlier was excluded because the reported reservation price was greater than 3
standard deviations away from the mean.
714
Table 4
Additional analysis sellers price premium
Partner exhibits high concern-for-others
Panel A: Descriptive statistics sellers transfer price premium
Gain frame
6.36
(6.36)
n = 11
Loss frame
5.77
(6.41)
n = 13
Total
6.04
(6.25)
n = 24
DF
Panel B: ANOVA model a (dependent variable = price premium)
Partners objective
1
Frame
1
Partners objective * frame
1
Error
43
a
Total
13.50
(10.55)
n = 10
8.63
(8.09)
n = 15
10.58
(9.27)
n = 25
9.76
(9.15)
n = 21
7.30
(7.37)
n = 28
8.36
(8.18)
n = 49
MS
166.08
107.29
129.70
51.21
3.24
2.10
2.53
0.08
0.16
0.12
marginally signicant main eect of the negotiation partners objective (F = 3.24, p = 0.08) suggests that sellers who were negotiating with a
high concern-for-others partner expected to give
up a greater share of divisional prot during the
negotiation process and thus predicted a lower
price premium compared to those who were negotiating with a partner with low concern-for-others.
Neither framing (F = 2.10, p = 0.16) or the interaction (F = 2.53, p = 0.12) are signicant.13
Together, these results show that the goal frame
and the negotiation partners objective have dierent eects on dierent aspects of managers transfer price judgments. Specically, as individuals are
more resistant to avoiding losses than increasing
gains, a loss frame increases the sellers reservation
price and eventually, their nal estimated transfer
price. On the other hand, the negotiation partners
concern-for-others provides the sellers with an
indication of the potential oers/counteroers during transfer price negotiation, thus inuencing the
price premium the sellers expect on top of their
reservation price.
13
715
716
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