Available online at www.sciencedirect.

com

Accounting, Organizations and Society 33 (2008) 704717 www.elsevier.com/locate/aos

The eect of framing and negotiation partners objective on judgments about negotiated transfer prices
Linda Chang, Mandy Cheng, Ken T. Trotman *
School of Accounting, The University of New South Wales, Sydney 2052, Australia

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

Corresponding author. Tel.: +61 2 9385 5831; fax: +61 2 9662 4491. E-mail address: k.trotman@unsw.edu.au (K.T. Trotman).

a potentially useful control mechanism, allowing a balance between economic considerations and broader social concerns by interdependent divisions (Kachelmeier & Towry, 2002). These transfer price negotiations are important to managers as they inuence both their own and other divisional prots. Previous research has shown that these transfer prices are aected by both economic factors (market prices) and behavioural factors including fairness (Luft & Libby, 1997).

0361-3682/$ - see front matter Crown Copyright 2008 Published by Elsevier Ltd. All rights reserved. doi:10.1016/j.aos.2008.01.002

L. Chang et al. / Accounting, Organizations and Society 33 (2008) 704717

705

In the current study, we examine 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 managers perception of the other negotiation partys objective (whether their partners objective involves high or low concern-for-others). These expectations are important as they directly aect the costs and outcomes of negotiations (Ghosh, 2000; Luft & Libby, 1997; Trotman, Wright, & Wright, 2005). 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). The self-serving bias refers to the cognitive bias arising from an individuals tendency to view an outcome more favourable to them as being fairer when resolving conicts1 (Thompson & Loewenstein, 1992). Specically, where an active external market exists, and the market price is greater than a price that would lead to both divisions receiving an equal prot, a seller will generally consider the market price to be a fairer transfer price as it results in a higher prot for the selling division. The buyer, however, would view the transfer price that allows prot to be equally shared between the two divisions as a fairer price (Luft & Libby, 1997). Both Luft and Libby (1997) and Kachelmeier and Towry (2002) found that where market price diered from the equal-prot price, managers based their transfer price judgments on both the market price and the equal-prot price. Furthermore, both studies found that sellers and buyers placed dierent weights on these two reference points when formulating judgments. Specically, due to selfserving biases, sellers transfer price expectations were closer to the market price than that of the buyers, while buyers expectations were closer to the equal-prot price. One likely eect of a transfer price expectation gap between buyers and sellers
This is in contrast with self-interest, which refers to a negotiators motivation to advance their own outcomes. Individuals with a high level of self-interest do not necessarily have a biased view of what constitutes a fair outcome; rather, they are motivated to achieve a favourable outcome for themselves.
1

is a prolonged and inecient negotiation process. While this may be avoided by the intervention of top management to mediate any inter-divisional dispute, such an approach would undermine the autonomy of decentralised divisional managers. Instead, if we have a better understanding of those factors that inuence managers transfer price judgments, we may be able to overcome managers biases by re-designing the negotiation process. Prior research in psychology suggests that the key to understanding how managers make negotiation judgments is to examine the way in which managers dene their negotiation context, and their perception of variables that are critical and endogenous to the negotiation process (Bazerman, Curhan, Moore, & Valley, 2000; Ghosh & Boldt, 2004; Kristensen & Garling, 1997; Neale & Bazerman, 1992). Neale and Bazerman (1992) in particular have argued that: Rather than focus only on external factors [to the negotiation process], it may be most useful to view situations from an interpretive perspective. It may not be the objective, external aspects of the situation that directly aect negotiator judgment; instead, it may be the way that the negotiator perceives these features and uses those perceptions to interpret and screen information. (Neale & Bazerman, 1992, p. 161, emphasis added). Two factors that are of particular interest in the current study are the goal frame adopted by managers, which aects the way managers perceive the negotiation outcome, and the negotiation partners objective (also called social concern) which aects the way managers perceive the negotiation partner. Both of these variables are found to be important in the psychology and economics literature (e.g. Kahneman & Tversky, 1979; Lewicki, Saunders, & Barry, 2005; Neale & Bazerman, 1992; Roth, 1995), but are generally controlled for rather than manipulated in prior accounting studies. For example, both Luft and Libby (1997) and Kachelmeier and Towry (2002) adopted a consistent positive goal frame in all their treatments, and controlled for negotiation partners objectives by telling their participants that a positive relationship existed between negotiators.

706

L. Chang et al. / Accounting, Organizations and Society 33 (2008) 704717

We extend these earlier studies by examining the impact of these variables on managers selfserving biases in a transfer pricing setting. There are benets in studying these two variables simultaneously. We suggest that the reason the loss frame aects negotiation judgments is because it causes managers to become more concerned about their own outcome (not to incur any further losses), exacerbating their self-serving bias. Their negotiation partners objective also is expected to inuence the level of concern managers have for their own outcome. For example, a perception that the negotiation partner has high concern-for-others causes managers to be more willing to give up some of their divisional prot and accept a less favourable transfer price. By using both cognitive and social lenses together, we attempt to obtain a more unied understanding of how the negotiation process works and eventually, how to overcome barriers to eective negotiation. The study of these variables is important because of their implications both for transfer pricing and for their impact more generally on systems and processes in decentralised organisations that use management accounting information. Transfer price negotiations, in particular, allow business unit managers to utilise and share their local knowledge (Dikoli & Vaysman, 2006) and maintain inter-divisional coordination while preserving autonomy (van Helden, van der Meer-Kooistra, & Scapens, 2001). The cost of negotiation, however, is not negligible, and the negotiation approach to transfer price determination is only recommended when the cost of bargaining is relatively low (Dikoli & Vaysman, 2006).2 A number of accounting studies (e.g. Kachelmeier & Towry, 2002; Luft & Libby, 1997) have demonstrated that the self-serving bias is one factor that can reduce the accuracy of manag2 In addition, while the perception of a fairer outcome can result in a more positive feeling at the end of the negotiation process (Lewicki et al., 2005), this perception may have negative consequences for rms as divisions use prot equality as an argument for fairer outcomes. As the gap between equal-prot price and market price grows bigger, the pursuit of prot equality may give rise to an internal socialism problem where rms ineciently try to equalise divisional performance (Bolton & Scharfsein, 1998). The resultant impact is the distortion of prots as a result of managers pursuit of prot equality.

ers transfer price judgments and thus potentially increase the time and costs of negotiation. An understanding of framing and negotiation partners objective also has wider implications for the management accounting literature and these implications are included in our Discussion section. In summary, our study makes a number of signicant contributions to the accounting literature. First, we extend the Luft and Libbys (1997) results by investigating the inuence of managers perception of the negotiation context on transfer price judgments. We specically address the role of framing and the negotiation partners objective. The rst factor is directly controllable by management accountants. For example, management accountants can produce reports based on alternative negotiating reference points to support a sellermanager involved in a transfer price negotiation. When the market price is used as a reference point, the management accounting reports are likely to highlight the potential loss in prot as the negotiated transfer price falls below the market price (Perera, McKinnon, & Harrison, 2003). This will lead to the negotiating manager adopting a loss frame. Alternatively, the reports can use product costs as a reference point, focusing on the gains in prot as the negotiated transfer price moves above the product costs (Colbert & Spicer, 1995). This is likely to cause the negotiating manager to adopt a gain frame. Second, the importance of social considerations was highlighted by both Luft and Libby (1997) and Kachelmeier and Towry (2002) when they found evidence of the eect of fairness concerns on transfer price judgments. Building on this research, we demonstrate, in a situation where market prices are above equal-prot prices, that managers expect the nal transfer price to be lower when they are dealing with a partner with high concern-for-others than when negotiating with a partner with low concern-for-others.3 This is because managers tend to

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.

L. Chang et al. / Accounting, Organizations and Society 33 (2008) 704717

707

reciprocate the perceived social concerns of their negotiation partner. The lower price, however, is also further from the market price which has implications for production divisions that depend on the transfer price and may have longer term implications if managers are put under increased pressure to reach prot targets. Deviations from the market price also have potential negative implications on intra-organisational resource allocation (Bolton & Scharfsein, 1998). As noted by Sprinkle (2003), it is important to study the extent to what social motives, and other aspects of a rms information systems, interact with the more formal accounting systems to aect managerial behaviour. Our results imply that these two factors signicantly inuence the way managers make use of accounting information when making transfer price judgments. Third, our study 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 dierence between the reservation price and the estimated transfer price). Our results show that a loss frame increases the sellers reservation price, and thus eventually their nal transfer price judgment. In contrast, negotiation partners objective did not aect reservation price judgment, but rather, we found that sellers who perceived their partner to have a high level of concern-for-others were more willing to accept a lower price premium. Finally, inter-divisional negotiation (such as transfer price negotiations) is an important control mechanism that balances divisional autonomy with inter-divisional coordination (van Helden et al., 2001). Our study extends the growing literature 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 Conventional economic arguments suggest that transfer price judgments should be based on eco-

nomically rational concerns such as the market price, transaction costs and the divisions cost structure (e.g. Colbert & Spicer, 1995). However, prior literature in psychology has demonstrated that negotiators do not always act rationally. Rather, they suer from a number of judgmental biases, such as anchoring their decisions on irrelevant information, and the escalation of commitment (e.g. Bazerman & Neale, 1992; Neale & Bazerman, 1992; Northcraft & Neale, 1987). In the accounting literature, Luft and Libby (1997) have shown that, during transfer price negotiation, sellers estimates of negotiated transfer prices tend to be signicantly higher than those of buyers, particularly when the market price is higher than the equal-prot price. Luft and Libby (1997) argue that their nding demonstrates the existence of a self-serving bias, which causes managers to overweigh the negotiation outcome that is most benecial to them (Luft & Libby, 1997; Thompson & Loewenstein, 1992). Thus, where more than one denition of a fair transfer price exists (e.g. in the Luft & Libby, 1997 study, where market price was higher than the equal-prot price),4 negotiating managers will interpret fairness in ways that favour their position, such that the transfer price estimates by sellers are signicantly higher than the transfer price estimates by buyers. Before developing our hypotheses we rst replicate the baseline condition established in Luft and Libby (1997) on the dierence in transfer price judgments between sellers and buyers resulting from the self-serving bias. H1: Sellers estimated nal transfer prices are higher than buyers estimated nal transfer prices. Frames are subjective cognitive systems through which individuals evaluate and make sense
The prevailing market price is often perceived as a fair transfer price because it is the result of impartial market forces of supply and demand. On the other hand, a fair price can also be dened as one that provides equal prot to both negotiating divisions (i.e. the equal-prot price). The concept of equalprot price is likely to be particularly salient in the internal transfer price negotiation process, where the negotiating managers belong to the same company, and inter-divisional equity becomes an important concern.
4

708

L. Chang et al. / Accounting, Organizations and Society 33 (2008) 704717

of situations they are in. Dierent frames adopted can lead individuals to pursue or avoid subsequent actions (Lewicki et al., 2005). Traditionally, negotiation literature has focused on the eect of risk preference framing (Bottom & Studt, 1993; Kahneman & Tversky, 1979; Neale & Bazerman, 1985; Thaler, 1992) a framing eect characterised by a choice between outcome certainty and a more risky alternative. The underlying decision valence is then manipulated, such that a loss frame is represented by uncertainties surrounding a negative consequence, and a gain frame is represented by uncertainty surrounding a positive consequence.5 For example, Neale and Bazerman (1985) investigated the risk frame in a management/union negotiation by either telling the participants that any concessions made by the company will result in signicant nancial losses (loss frame), or any concessions from the union will result in signicant nancial gains (gain frame). All impasses were to be referred to an arbitrator, and as the arbitrators nal decision was unknown, this presented the participants with a risk element. Inter alia, they found that compared to negotiators with gain frames, negotiators with loss frames were more likely to have their agreements determined by the arbitrator (i.e. they chose the riskier option). They also found that compared to gain framed negotiators, loss framed negotiators were less likely to make concessions. In this study, we examine the framing role of accounting information, and how this aects managers transfer price judgments. Our focus is on using accounting information to frame the negotiation goal. We propose that because managers are more concerned with avoiding losses than increasing gains both buyers and sellers are more likely to focus on maximising their divisional prot when given a loss frame compared to a gain frame. This

greater concern for achieving their own outcome is likely to further increase the transfer price judgement gaps between buyers and sellers. Prior literature on motivated reasoning suggests that a higher level of motivation to achieve an outcome can lead people to overestimate the probability that a favourable outcome will eventuate (Brownstein, 2003). Further, motivated reasoning also distorts peoples perception of others, such that they tend to expect others to behave in a way that results in favourable outcomes (Kunda, 1990). In the context of a negotiation, we predict that the loss framed managers greater concern for maximising their divisional prot will cause them to overestimate the likelihood that their partner will take their view of what constitutes a fair price, and thus agree on a transfer price more favourable to them. Specically, sellers (buyers) with a loss frame are more likely to believe that their partner will agree on a higher (lower) price being a fair transfer price, compared to sellers with a gain frame. As such, we predict that a loss frame will increase negotiators self-serving biases. In addition, as loss framed managers become more motivated to achieve a better outcome, they may be more willing to incur greater bargaining costs compared to gain framed managers. In the absence of any information about their partners negotiation frame (and thus the level of their partners motivation), the loss framed managers are also likely to expect their willingness to incur greater bargaining costs will lead to a more favourable outcome. As such, we predict that the transfer price judgement gap between buyers and sellers is greater under the loss frame than the gain frame condition.6

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.

As we do not manipulate or provide information about the negotiation partners frame, buyers and sellers may not be making the same transfer price predictions. For example, the seller in the loss frame is predicting the price that a loss framed seller and a buyer with unknown or neutral frame will negotiate, whereas the buyer in the loss frame is predicting the price that a loss framed buyer and a seller with an unknown or neutral frame will negotiate. Even if both buyers and sellers assume the same (e.g. neutral) frame for their negotiation partner, the dierences in transfer price predictions by sellers and buyers are still not necessarily all self-serving bias and may, in fact, be partially due to the lack of information about their negotiation partners frame.

L. Chang et al. / Accounting, Organizations and Society 33 (2008) 704717

709

H2: The dierence in estimated nal transfer price between buyers and sellers is smaller when information provided to negotiating managers is framed as gains rather than losses. A number of prior studies have suggested that social concerns inuence transfer price negotiation judgments (e.g. Kachelmeier & Towry, 2002; Luft & Libby, 1997). Both Luft and Libby (1997) and Kachelmeier and Towry (2002) found that while economic rationality would dictate that negotiators should expect market-based transfer prices, negotiators have an aversion to unequal prots. While they attributed this aversion to negotiators concerns about prot sharing and ensuring both divisions receive satisfactory prots, the impact of social concern was not directly tested. In this study, we seek to directly examine the eects social concerns have on transfer price judgements. We propose that managers concerns about unequal prots and therefore their transfer price judgments may be aected by the perception they have of their negotiation partner (i.e. the other party to the negotiation process). In particular, during negotiation, managers would try to gauge their partners objective, and then combine this information with their own negotiation objective when formulating their transfer price judgments (e.g. Carroll, Bazerman, & Maury, 1988; Lewicki et al., 2005). An established framework used to explain a negotiators objective is the dual concern model (e.g. Lewicki et al., 2005; Pruitt, 1983; Sorenson, Morse, & Savage, 1999). This framework postulates that a negotiators objective is inuenced by two independent types of concerns: concern for their own outcomes (concern-for-self) and concern for the other partys outcomes (concernfor-others). Our focus in the current study is on a managers perception of their partners degree of concern-for-others. Our manipulation of this variable is consistent with large variations of concern-for-others in transfer pricing situations; for example, the level of concern for the prots of other divisions is likely to vary in organisations that are quasi-markets compared to quasi-families (Eccles, 1985, pp. 273278).

Following the suggestion in previous research (Kachelmeier & Towry, 2002; Luft & Libby, 1997), in situations where the market price is higher than the equal-prot prices, that this concern-for-others results in transfer prices below market prices, we predict that when the level of concern-for-others is stronger, both buyer and seller will expect the price to be lower. We note that this prediction only holds for situations where the market price is higher than the equal-prot price, which is the case in our experiment. The above prediction particularly applies when the level of concern is similar for both negotiators in the pair. While we only manipulate the level of concern-for-others for the negotiation partner, we suggest this is likely to result in a similar level of concern for the negotiating manager for two reasons. First, the psychology literature refers to the reciprocity principle as a social norm by which an individual who acts in a certain way will expect a similar return action (e.g. Maxwell, Nye, & Maxwell, 2003).7 The norm of reciprocity therefore establishes expectations about how one is to behave in social interactions (Maxwell et al., 2003). Prior research has consistently found that negotiators have a tendency to reciprocate negotiation motives of their negotiation partners (Maxwell et al., 2003). Therefore, negotiating managers who perceive that their negotiating partner has high concern-for-others will reciprocate with a similar objective, showing high concern for prot sharing, In contrast, negotiating managers who perceive that their partner has low concern-for-others are expected to reciprocate by showing low concern for prot sharing. Second, organisations dier in the types of employee behaviours that are considered acceptable. For example, our low concern-for-others manipulation would be acceptable in some organisations but clearly unacceptable in other organisations. By informing a participant about the negotiation partners concerns-for-others we also tell participants something about the culture of the organisation. Specically, our manipulation
The reciprocity principle has also recently been introduced into the audit literature in auditclient negotiations (Sanchez, Agoglia, & Hateld, 2007; Tan & Trotman, 2007).
7

710

L. Chang et al. / Accounting, Organizations and Society 33 (2008) 704717

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.

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.

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). 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

Two main modications were made to the Luft and Libby (1997) instrument to accommodate two of our variables of interest (discussed in more detail later). A pilot test was then conducted (with 21 undergraduate accounting students) to ensure that our modications were understood by our participants and that the independent manipulated variables had the intended eects. As a result of the pilot test, and discussions with pilot test participants post-experiment, further minor modications were made.

The current task focuses on a distributive (xed pie) negotiation task, that is, the managers are negotiating in a win lose situation where their goals are in direct conict. 10 Specically, based on Luft and Libbys (1997) scenario, the value of the shipment of Parts to the Assembly Division was $80 per unit; while the value (or cost) to the Parts Division was $20 per unit. This means that the prot for the Assembly department was ($80 less negotiated transfer price); while the prot for the Parts Division was (transfer price less $20). Thus, at a transfer price of $50 per unit, both divisions would obtain a prot of $30 per unit.

L. Chang et al. / Accounting, Organizations and Society 33 (2008) 704717

711

A: Profit schedule for Assembly managers (i.e. buyers)/Gain frame information Transfer price for Parts PARTS profit ($000) ASSEMBLY profit ($000) 80 75 70 65 60 55 50 45 40 35 30 25 20 60 55 50 45 40 35 30 25 20 15 10 0 5 5 0

10 15 20 25 30 35 40 45 50 55 60

B: Profit schedule for Assembly managers (i.e. buyers)/Loss frame information Transfer price for Parts PARTS profit ($000) ASSEMBLY profit ($000) 20 25 30 35 40 45 50 55 60 65 70 75 80 0 5 10 15 20 25 30 35 40 45 50 55 60 5 0

60 55 50 45 40 35 30 25 20 15 10

Fig. 1. Sample prot schedules provided to experimental participants.

For participants assigned a loss frame, the description explained how every $5 change in the transfer price would result in the division losing $5000. Further, participants were also provided with a schedule of prot framed either as prot increases or prot decreases as the transfer price changed (refer to Fig. 1). To manipulate the negotiation partners objective, participants were provided with a ctitious memo indicating their negotiation partners level of concern-for-others. Participants assigned to the high concern-for-others conditions were given a memo stressing their partners desire for mutual concession and maximising prot for both divisions. In contrast, participants in the low concern-for-others conditions were given a memo emphasising their partners desire to maximise prot for their own division only and their unwillingness to make concessions. For example, the memo from a partner with low concern-for-others highlighted their intention to . . . achieve the best prot for my division . . . if you are unwilling to make concessions, I am prepared to trade externally. 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

(i.e. sellers reservation price).11 Consistent with Luft and Libby (1997), to minimise the time required for data collection we did not ask participants to estimate buyers reservation price. 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

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.

712

L. Chang et al. / Accounting, Organizations and Society 33 (2008) 704717

Table 1 Means (standard deviation) of estimated nal transfer price ($) Partners objective High concern-for-others Gain frame Sellers 58.64 (7.10) n = 11 57.69 (8.32) n = 13 58.13 (7.63) n = 24 Loss frame 61.92 (8.04) n = 13 52.73 (10.57) n = 11 57.71 (10.21) n = 24 Total 60.42 (7.65) n = 24 55.42 (9.55) n = 24 57.92 (8.92) n = 48 Low concern-for-others Gain frame 62.50 (9.50) n = 10 60.30 (7.51) n = 10 61.40 (8.41) n = 20 Loss frame 65.50 (6.96) n = 15 56.92 (10.52) n = 13 61.52 (9.56) n = 28 Total 64.30 (7.89) n = 25 58.39 (9.29) n = 23 61.47 (9.01) n = 48 Gain frame 60.48 (8.35) n = 21 58.83 (7.91) n = 23 59.61 (8.01) n = 44 Loss frame 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 Frame total Total

Buyers

Column total

were acting as a Parts manager or an Assembly manager). The second asked participants to indicate whether their negotiation partners were interested in maximising both divisions prots, or only their own divisions prot. The third asked participants to indicate whether the case material stated that for every $5 increase in transfer price you stand to lose $5000 prot, or for every $5 decrease in transfer price you stand to gain $5000 prot.12 Results Hypothesis testing The descriptive statistics for estimated transfer price are summarised in Table 1, and a 2 2 2 ANOVA model, with estimated transfer price as the dependent variable, is presented in Table 2. As can be seen from Table 1, and consistent with H1, the average estimated transfer price was higher for sellers (62.40) than for buyers (56.87). This dierence (the main eect of role) is statistically signicant (F = 8.71, p = 0.00), thus H1 is supported. H2 predicted that the dierence in estimated transfer prices between buyers and sellers would be smaller when potential negotiation outcomes are framed as gains rather than losses. The descrip12 56% of the manipulation test errors related to the framing eect. All statistical tests were re-run after including participants who failed the manipulation tests, and all results remained statistically the same.

Table 2 ANOVA model for estimated transfer price H1 and H2 DF Negotiators role Partners objective Frame Role * objective Role * Frame Objective * frame Role * objective * frame Error 1 1 1 1 1 1 1 88 MS 644.11 298.70 6.22 0.60 315.05 2.49 5.16 73.93 F 8.71 4.04 0.08 0.01 4.26 0.03 0.07 p 0.00a 0.02 0.39 0.46 0.02b 0.43 0.40

Negotiator role participants acting as either a buyer or a seller. Partners objective either high or low concern-for-others. Frame accounting information presented in either a gain or a loss goal frame. a The signicant main eect of negotiators role provides support for H1. b The signicant interaction eect between frame and role provides support for H2.

tive statistics in Table 1 further indicate that the dierence in estimated transfer prices between sellers and buyers under the gain frame condition (60.48 58.83 = 1.65) was lower than that under the loss frame condition (63.84 55.00 = 8.84). This dierence is shown in Table 2 as a signicant interaction eect between role and goal frame (F = 4.26, p = 0.02), thus H2 is supported. H3 examined the eect of the negotiation partners objective on managers transfer price judgments. In H3, we expected the negotiation partners objective to have a main eect, where both buyers and sellers transfer price expectations would be lower if they were negotiating with

L. Chang et al. / Accounting, Organizations and Society 33 (2008) 704717

713

a partner with high concern-for-others than if with a partner who had low concern-for-others. The overall ANOVA model as shown in Table 2 conrmed our expectation (signicant main eect for negotiation partners objective, F = 4.04, p = 0.02) thus, H3 is supported. Additional analysis We also conducted additional analyses to delineate the eect of goal framing and the negotiation partners objective on two elements of managers transfer price judgments: the reservation price and the dierence between the reservation price and the estimated transfer price (which we refer to as price premium). The reservation price (also known as the resistance point) represents the minimal price sellers are willing to accept from the transaction (e.g. for sellers, this means the minimal acceptable price Lewicki et al., 2005). In contrast, the price premium reects the extent to which negotiators expect to achieve their desired outcome. That is, the price premium incorporates negotiators anticipation of the concession they will make during the oercounteroer process in negotiation. The descriptive statistics of these two variables are shown in Tables 3 and 4.
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

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

Partner exhibits low concern-for-others 49.00 (16.13) n = 10 56.87 (12.51) n = 15 53.72 (14.29) n = 25 MS F 0.01 6.33 1.06

Total 50.71 (12.07) n = 21 56.54 (10.55) n = 28 54.04 (11.48) n = 49 p 0.94 0.02 0.31

Panel B: ANOVA model a (dependent variable = sellers reservation price) Partners objective 1 0.56 Frame 1 641.74 Partners objective * frame 1 107.86 Error 43 101.40

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

L. Chang et al. / Accounting, Organizations and Society 33 (2008) 704717

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

Partner exhibits low concern-for-others 13.50 (10.55) n = 10 8.63 (8.09) n = 15 10.58 (9.27) n = 25 MS 166.08 107.29 129.70 51.21 F 3.24 2.10 2.53

Total 9.76 (9.15) n = 21 7.30 (7.37) n = 28 8.36 (8.18) n = 49 p 0.08 0.16 0.12

Price premium = (sellers reservation price transfer price estimate).

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.

Summary and discussion In this study, we examined whether managers perceptions of potential negotiation outcomes (framed either as potential gains or potential losses) and of their negotiation partner (exhibiting high or low concern-for-others) aected self-serving biases and consequently their transfer price judgments. We found that compared to a gain frame, a loss frame exacerbates managers selfserving biases and increases the transfer price expectation gap between buyers and sellers. Further, we found that the negotiation partners objective had a signicant impact on sellers transfer price judgments. Consistent with the norm of reciprocity, our results show that, in situations where market prices are higher than equalprot prices, managers reciprocated their partners concerns and expected lower transfer prices when their negotiation partner exhibited high concernfor-others, and expected higher transfer prices when their negotiation partner exhibited low concern-for-others. This nding is particularly interesting as sellers in our experiment had relatively strong bargaining power but these sellers did not exploit their bargaining power by demanding high transfer prices regardless of their partners level of concern-for-others. Instead, we found that sellers

Due to the relatively small sample size, however, the statistical inferences of our additional analysis should be interpreted with care.

13

L. Chang et al. / Accounting, Organizations and Society 33 (2008) 704717

715

were sensitive to their partners objective, and were more willing to accept a less advantageous outcome if their partner showed high concern-forothers. The additional analysis suggests that goal framing and the negotiation partners objective have dierent impacts on managers negotiation judgments. When we decompose the transfer price judgments into two subcomponents: the reservation price and a price premium, we found that the loss frame resulted in managers reporting a higher reservation price. On the other hand, managers perception of their partners objective had signicant impact on their price premiums. Our study has important implications for both researchers and practitioners. Prior research has shown that negotiating managers suer from selfserving biases, which result in a signicant dierence in expected transfer prices between buyers and sellers. We extended this line of research by examining how these dierences in transfer price expectations are aected by managers perceptions of the negotiation context. Understanding managers transfer price expectations is important, as differences in expectations between buyers and sellers can lead to prolonged disputes and thus a costly negotiation process (Luft & Libby, 1997). Our ndings that the provision of loss framed information increases the buyerseller expectation gap can also have a signicant impact on organisations. We note that systems and processes using management accounting can either inadvertently or by design cause managers to adopt dierent frames. For example, practitioner literature often advocates the use of customer protability information to support customer negotiation (Kaplan & Cooper, 1998) and negotiators may be given a price menu listing a range of service levels and their associated costs (Kaplan & Anderson, 2007). In such circumstances, management accounting information can be presented in a way that induces either a gain frame or a loss frame. Specically, management accounting reports can either describe the incremental cost increases with each service level (e.g. incremental cost of $500 every time a customer requests an additional sales visit), or the incremental cost savings (e.g. incremental costs savings of $500 per

sales visit reduced). The former is likely to induce a loss frame and the latter a gain frame.14 The practitioners self-help literature on negotiation often discusses the importance of building rapport and aliation at the negotiation table (Fisher & Shapiro, 2005). Our study provides empirical support for the importance of communicating a positive objective. Our results show that managers expect a lower transfer price (closer to the equal-prot price) when they perceive that their negotiation partners have high concern-forothers. Our results imply that showing high concern-for-others (as opposed to showing low concern-for-others) can be eective in persuading negotiation opponents (especially sellers) to consider their perceptions. Our additional analysis suggests that managers perceptions of the negotiation outcomes and of their negotiation partners aect dierent aspects of the negotiation process. This nding enhances our understanding of how to de-bias managers self-biased transfer price judgments. By framing the prot information dierently we can 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. For example, incentive schemes that focus too much on the stick rather than the carrot may increase distrust (Fehr & Ga chter, 2000), potentially heighten managers concern-for-self relative to their concern-for-others, and thus reduce managers willingness to reciprocate positively during negotiation. Similar to earlier studies on transfer price negotiation (Luft & Libby, 1997; Kachelmeier & Towry, 2002), our results demonstrate a strong desire by participants to take fairness into account when making transfer price judgments, such that regardless of their role or the treatment, the resultant transfer price judgment is dierent from the external market price. On the other hand, Bolton and Scharfsein (1998) argue that the pursuit of
Framing is also important in capital investment analysis as nancial outcomes can be presented in terms of prots or losses (e.g. Moreno, Kida, & Smith, 2002).
14

716

L. Chang et al. / Accounting, Organizations and Society 33 (2008) 704717

internal socialism can be costly, as decentralised rms sometimes try to equalise divisional prot at the expense of resource allocation eciencies. Our results show that internal socialism is also likely to arise from inter-divisional negotiations, potentially adding to the costs of internal transactions. An understanding of framing and negotiation partners objective has wider implications than just transfer pricing given that other inter-divisional negotiation is common in decentralised organisations. For example, a production manager may need to negotiate inventory management and delivery policies with the marketing division; and a research and development (R&D) manager in one division may need to negotiate with the R& D manager in another division over resource allocation issues in collaborative projects (Coletti, Sedatole, & Towry, 2005). The impact of these variables on negotiations also has implications for organisation design. For example, larger self-serving biases result in bigger errors in judging the outcome a bargaining partner will accept in the end. These higher selfserving biases have been shown to have a negative impact on reaching an agreement and create more impasses (Babcock & Loewenstein, 1997; Gelfand et al., 2002). Consequently, as decentralised organisations rely more on negotiation between peers, if the setting is one where large self-serving biases are likely to be present, these decentralised organisations will not work as eectively. They will require greater interventions from headquarters and more hierarchical decision making, thus making decentralisation more costly and less eective. Acknowledgment We gratefully acknowledge a research grant from the Australian Research Council and the helpful comments from Joan Luft, Sue Haka, Kim Langeld-Smith, Anne Lillis, Steve Salterio, Jane Baxter, Brian Burtt and Habib Mahama, as well as seminar participants at University of Cincinnati, University of Melbourne, 2006 AFAANZ Conference and 2005 EAA Conference.

References
Babcock, L., & Loewenstein, G. (1997). Explaining bargaining impasse: The role of self-serving biases. Journal of Economic Perspectives, 11(1), 109126. Bame-Aldred, C. W., & Kida, T. (2007). A comparison of auditor and client negotiation decisions. Accounting, Organizations and Society, 32(6), 497511. Bazerman, M., Curhan, J., Moore, D., & Valley, K. (2000). Negotiation. Annual Review of Psychology, 51, 279312. Bazerman, M. H., & Neale, M. A. (1992). Negotiating rationality. New York: The Free Press. Bolton, P., & Scharfsein, D. (1998). Corporate nance, the theory of the rm, and organizations. Journal of Economic Perspectives, 12(4), 95114. Bottom, W. P., & Studt, A. (1993). Framing eects and the distributive aspect of integrative bargaining. Organizational Behavior and Human Decision Processes, 56(3), 459 474. Brownstein, A. (2003). Biased precision processing. Psychological Bulletin, 129(4), 545568. Carroll, J. S., Bazerman, M. H., & Maury, R. (1988). Negotiator cognitions: A descriptive approach to negotiators understanding of their opponents. Organizational Behavior and Human Decision Processes, 41(3), 352370. Colbert, G., & Spicer, B. (1995). A multi-case investigation of a theory of the transfer pricing process. Accounting, Organizations and Society, 20(6), 423456. Coletti, A., Sedatole, K., & Towry, K. (2005). The eect of control systems on trust and cooperation in collaborative environment. The Accounting Review, 80(2), 477500. Dikoli, S., & Vaysman, I. (2006). Information technology, organizational design, and transfer pricing. Journal of Accounting and Economics, 41, 203236. Eccles, R. (1985). The transfer pricing problem. Lexington, MA: Lexington Books. Fehr, E., & Ga chter, S. (2000). Fairness and retaliation: The economics of reciprocity. Journal of Economic Perspectives, 14(3), 159181. Fisher, R., & Shapiro, D. (2005). Beyond reason: Using emotions as you negotiate. Random House Business Books. Gelfand, M., Higgins, M., Nishii, L., Raver, L., Dominguez, A., Murakami, F., et al. (2002). Culture and egocentric perceptions of fairness in conict and negotiation. Journal of Applied Psychology, 87(5), 833845. Ghosh, D. (2000). Complementary arrangements of organizational factors and outcomes of negotiated transfer price. Accounting, Organizations and Society, 25, 661682. Ghosh, D., & Boldt, M. (2004). The outcome saliency eect on negotiated transfer prices. Journal of Managerial Issues, 16(3), 305321. Gibbins, M., McCracken, S. A., & Salterio, S. E. (2005). Negotiations over accounting issues: The congruency of audit partner and chief nancial ocer recalls. Auditing, 24, 171193. Gibbins, M., Salterio, S., & Webb, A. (2001). Evidence about auditorclient management negotiation concerning clients

L. Chang et al. / Accounting, Organizations and Society 33 (2008) 704717 nancial reporting. Journal of Accounting Research, 39(3), 535564. Kachelmeier, S. J., & Towry, K. L. (2002). Negotiated transfer pricing: Is fairness easier said than done?. Accounting Review 77, 571593. Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decisions under risk. Econometrica, 47, 263291. Kaplan, R., & Anderson, S. (2007). Time-driven activity-based costing. Harvard Business School Publishing. Kaplan, R., & Cooper, R. (1998). Cost and eect. Harvard Business School Publishing. Kristensen, H., & Garling, T. (1997). The eects of anchor points and reference points on negotiation process and outcome. Organizational Behavior and Human Decision Processes, 71(1), 8594. Kunda, Z. (1990). The case for motivated reasoning. Psychological Bulletin, 108(3), 480498. Levin, I., Schneider, S., & Gaeth, G. (1998). All frames are not created equal: A typology and critical analysis of framing eects. Organizational Behaviour and Human Decision Processes, 76(2), 149188. Lewicki, R., Saunders, D., & Barry, B. (2005). Negotiation (5th ed.). New York: McGraw Hill. Luft, J. L., & Libby, R. (1997). Prot comparisons, market prices and managers judgments about negotiated transfer prices. The Accounting Review, 72(2), 217229. Maxwell, S., Nye, P., & Maxwell, N. (2003). The wrath of the fairness-primed negotiator when the reciprocity norm is violated. Journal of Business Research, 56(5), 399409. Moreno, K., Kida, T., & Smith, J. (2002). The impact of aective reactions on risky decision making in accounting contexts. Journal of Accounting Research, 40(5), 13311349. Neale, M. A., & Bazerman, M. H. (1985). The eects of framing and negotiator overcondence on bargaining behaviors and outcomes. Academy of Management Journal, 28(1), 3449. Neale, M. A., & Bazerman, M. H. (1992). Negotiator cognition and rationality: A behavioural decision theory perspective. Organizational Behavior and Human Decision Processes, 51, 157175. Ng, T. B.-P., & Tan, H.-T. (2003). Eects of authoritative guidance availability and audit committee eectiveness on auditors judgments in an auditorclient negotiation context. The Accounting Review, 78(3), 801819.

717

Northcraft, G., & Neale, M. (1987). Experts, amateurs, and real estate: An anchoring-and-adjustment perspective on property pricing decisions. Organizational Behaviour and Human Decision Processes, 39, 8497. Perera, S., McKinnon, J. L., & Harrison, G. L. (2003). Diusion of transfer pricing innovation in the context of commercialization A longitudinal case study of a government trading enterprise. Management Accounting Research, 14(2), 140164. Pruitt, D. G. (1983). Strategic choice in negotiation. The American, 27(2), 167194. Roth, A. E. (1995). Bargaining experiments. The handbook of experimental economics. Princeton: University Press. Sanchez, M. H., Agoglia, C. P., & Hateld, R. C. (2007). The eect of auditors use of a reciprocity-based strategy on auditorclient negotiations. Accounting Review, 82(1), 241263. Sorenson, R. L., Morse, E. A., & Savage, G. T. (1999). A test of the motivations underlying choice of conict strategies in the dual-concern model. International Journal of Conict Management, 10(1), 2544. Sprinkle, G. B. (2003). Perspectives on experimental research in managerial accounting. Accounting, Organizations and Society, 28(2-3), 287318. Tan, H.-T, & Trotman, K. T. (2007). Eects of auditors concession timing on nancial ocers negotiation judgments. Working paper, The University of New South Wales. Thaler, R. H. (1992). The winners curse: Paradoxes and anomalies of economic life. Princeton, NJ: Princeton University Press. Thompson, L., & Loewenstein, G. (1992). Egocentric interpretations of fairness and interpersonal conict. Organizational Behavior and Human Decision Processes, 51(2), 176197. Trotman, K. T., Wright, A. M., & Wright, S. (2005). Auditor negotiations: An examination of the ecacy of intervention methods. The Accounting Review, 80(1), 349368. Tversky, A., & Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science, 211, 453463. van Helden, G., van der Meer-Kooistra, J., & Scapens, R. (2001). Co-ordination of internal transactions at Hoogovens Steel: Struggling with the tension between performanceoriented business units and the concept of an integrated company. Management Accounting Research, 12, 357386.