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Accounting, Organizations and Society 33 (2008) 704717

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

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.

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.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.

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

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.


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.


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

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

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
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.


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

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.

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

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

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
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).


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.

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

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

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.
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


A: Profit schedule for Assembly managers (i.e. buyers)/Gain frame information

Transfer price for Parts

80 75 70 65 60 55 50 45 40 35 30 25 20

PARTS profit ($000)

60 55 50 45 40 35 30 25 20 15 10

ASSEMBLY profit ($000)

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

20 25 30 35 40 45 50 55 60 65 70 75 80

PARTS profit ($000)

ASSEMBLY profit ($000)

60 55 50 45 40 35 30 25 20 15 10

10 15 20 25 30 35 40 45 50 55 60

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

(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.

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

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.

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


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

Table 1
Means (standard deviation) of estimated nal transfer price ($)
Partners objective

Frame total

High concern-for-others



Column total


Low concern-for-others

Gain frame

Loss frame


Gain frame

Loss frame


Gain frame

Loss frame

n = 11
n = 13
n = 24

n = 13
n = 11
n = 24

n = 24
n = 24
n = 48

n = 10
n = 10
n = 20

n = 15
n = 13
n = 28

n = 25
n = 23
n = 48

n = 21
n = 23
n = 44

n = 28
n = 24
n = 52

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
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
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.

n = 49
n = 47
n = 96

Table 2
ANOVA model for estimated transfer price H1 and H2

Negotiators role
Partners objective
Role * objective
Role * Frame
Objective * frame
Role * objective * frame







Negotiator role participants acting as either a buyer or a

Partners objective either high or low concern-for-others.
Frame accounting information presented in either a gain or a
loss goal frame.
The signicant main eect of negotiators role provides
support for H1.
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

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 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
n = 11
Loss frame
n = 13
n = 24

Partner exhibits low concern-for-others


n = 10
n = 15
n = 25

n = 21
n = 28
n = 49


Panel B: ANOVA model a (dependent variable = sellers reservation price)

Partners objective
Partners objective * frame



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.


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
n = 11
Loss frame
n = 13
n = 24
Panel B: ANOVA model a (dependent variable = price premium)
Partners objective
Partners objective * frame


n = 10
n = 15
n = 25

n = 21
n = 28
n = 49





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.


Partner exhibits low concern-for-others

Due to the relatively small sample size, however, the

statistical inferences of our additional analysis should be
interpreted with care.

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

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

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 & Gachter, 2000), potentially heighten
managers concern-for-self relative to their concern-for-others, and thus reduce managers willingness to reciprocate
positively during
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).


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
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.
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

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