The effect of framing and negotiation partner’s

objective on judgments about negotiated transfer

prices

Linda Chang, Mandy Cheng, Ken T. Trotman

Prepared by:
A A Gde Satia Utama©
• 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.
• 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)
• two factors affect managers’ perceptions of the negotiation context,
and thus the way they interpret the economic and social
consequences of accounting information
Introduction
• Whether the impact of accounting information on managers’ transfer
price expectations are moderated by the way accounting information
is framed (either as potential gains or potential losses) and the man-
ager’s perception of the other negotiation party’s objective (whether
their partner’s objective involves high or low concern-for-others)
• Previous negotiation literature has shown the importance of ‘fairness’
during negotiation and that participants’ estimates of a fair price
display a ‘self-serving bias’ (or egocentrism).
• Where market price differed from the equal-profit price, managers
based their transfer price judgments on both the market price and
the equal-profit price.
• Sellers and buyers placed different weights on these two reference
points when formulating judgments.
• Due to self serving biases, sellers’ transfer price expectations were
closer to the market price than that of the buy-ers, while buyers’
expectations were closer to the equal-profit price.
• Prior research in psychology suggests that the key to understanding
how managers make negoti- ation judgments is to examine the way in
which managers define their negotiation context, and their
perception of variables that are critical and endogenous to the
negotiation process
• Two factors that are of particular interest in the current study are the
goal frame adopted by man- agers, which affects the way managers
perceive the negotiation outcome, and the negotiation partner’s
objective (also called ‘social concern’) which affects the way
managers perceive the negotiation partner.
Contributions
Extend the Luft and Libby’s (1997) results by investigating the influence
of managers’ perception of the negotiation context on transfer price
judgments.
FramingDirectly controllable by management accountants
Luft and Libby (1997) and Kachelmeier and Towry (2002) when they
found evidence of the effect of fairness concerns on transfer price
judgments.
Extends the existing literature by examining the impact of the above
variables on two dimensions of transfer pricing judgments: a
reservation price and a price premium (i.e. the difference between the
reservation price and the estimated transfer price)
• Extends the growing litera- ture on improving negotiation outcomes
in accounting/auditing situations (Bame-Aldred & Kida, 2007; Gibbins,
McCracken, & Salterio, 2005; Gibbins, Salterio, & Webb, 2001; Ng &
Tan, 2003; Trotman et al., 2005) to the management accounting
arena, and in doing so, contributes to our understanding of the
challenges faced by decentralised organisations.
•
Literature review and hypotheses
development
• H1: Sellers’ estimated final transfer prices are higher than buyers’
estimated final transfer prices
• H2: The difference in estimated final transfer price between buyers
and sellers is smaller when information provided to negotiating
managers is framed as gains rather than losses
• 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 con- cern-for-others
Research methods Research design
• A controlled laboratory experiment was conducted to test the
proposed hypotheses, using a 2x2x2 between-subjects design. The
three independent variables were the negotiating manager’s role
(participants acting as either a buyer or a seller), goal frame (gain
frame or loss frame) and the negotiation partner’s objective (high or
low concern-for-others)
• For every $5 decrease in transfer price you stand to gain $5000 profit.
For example, by negotiating a transfer price of $55, your profit is
$25,000. But if you negotiate a lower transfer price, say, $50, your
profit is $30,000, which means that you have gained $5000 profit. In
other words, as you settle for a lower transfer price, you stand to gain
profit for your division in $5000 increments.
• Dependent variables. We measured the dependent variable,
managers’ estimated negotiation prices, by asking participants to
predict the final transfer price of the negotiation process.
Conclusion
• compared to a gain frame, a loss frame exacerbates managers’ self
serving biases and increases the transfer price expectation gap
between buyers and sellers.
• The negotiation partner’s objective had a significant impact on sellers’
transfer price judgments.
• Goal framing and the negotiation partner’s objective have different
impacts on managers’ negotiation judgments.
• The provision of loss framed information increases the buyer–seller
expectation gap can also have a significant impact on organisations
• Managers expect a lower transfer price (closer to the equal-profit
price) when they perceive that their negotiation partners have high
concern-for-others.
• Managers’ perceptions of the negotiation outcomes and of their
negotiation partners affect different aspects of the negotiation
process.
• Encourage sellers to set a lower reservation price, and at the same
time, organisations can also attempt to promote greater ‘concern-for-
others’ among sellers so that they are more likely to accept a lower
‘premium’ on top of their reservation price.