[Negotiation is frequently advocated as a transfer-pricing mechanism in decentralized organizations to foster greater divisional autonomy and to improve firm profit performance. Empirical evidence reveals that many firms rely upon negotiation in determining transfer prices. A concern, however, is that negotiation may not always be efficient in terms of maximizing firmwide profits, or equitable with regard to divisional performance evaluation. Given external market opportunities and private information with respect to divisional cost and revenue functions, one division could conceivably make itself better off at the expense of another or the firm as a whole. This study used a bilateral bargaining methodology to examine negotiated transfer-pricing outcomes between a buying and selling division. The negotiation was nonzero sum; that is, market externalities existed. Each division had private profit information. One hundred and thirty-four subjects participated in face-to-face negotiations. Experimental manipulation included a mixed-incentive (company and divisional) scheme versus a divisional-incentive scheme; single-period versus multiperiod negotiations; and varying levels of market price uncertainty in the negotiations. It was hypothesized that divisional-incentive schemes would increase profit differences between divisions but would be more effective in terms of maximizing overall company profits. Absent learning effects, a negotiation history was expected to increase company profits as bargaining strategies evolved over time. Finally, divisional profit differences were hypothesized to increase in the face of uncertain market alternatives available to either the buying or selling division. The results indicate that divisional incentives did not produce greater divisional profit differences than mixed incentives. However, as hypothesized, uncertain outside market alternatives significantly increased divisional profit differences. Company profits increased significantly under divisional incentives and through time. Finally, single-period profits were significantly lower than final multiperiod profits. The results have potentially important implications for research on negotiated transfer pricing under decentralization. First, divisional profit-based incentives appear to motivate negotiators to achieve higher company profits regardless of outside market alternatives. Bargaining strategies evolved over time, leading to an increase in company profits. Negotiated transfer prices, however, do not always attain the desired objective of maximizing companies' profits or providing equitable divisional performance evaluation. This was particularly true in cases of short negotiation histories and in cases of uncertain market environments. Results of this study suggest that one way to mitigate these dysfunctional consequences is through the company's incentive system. Mixed (company and divisional) incentives in uncertain environments appear to lead to more integrative agreements, benefiting both the company and the division. Because these results are based upon analysis of experiments, caution must be exercised in generalizing the conclusions beyond this setting.]

Negotiations between buyers and suppliers that require sharing cost details to identify profitable relationship specific investments often fail and result in hold-ups. Based on inequity aversion, strategic uncertainty, and risk dominance criteria, we expect negotiators to be more reluctant to share fine information than coarse, less detailed information, which suggests that fine information systems can exacerbate hold-ups. When negotiators share fine information they achieve more efficient bargaining agreements. However, we find that strategic concerns about inequitable outcomes (fear of opportunistic behavior) lead fewer negotiating pairs to share fine information (where inequitable outcomes can be larger) than coarse information (where inequitable outcomes are smaller). Our results demonstrate that information fineness leads negotiators to trade-off potential utility losses due to fairness considerations and potential monetary gains. Fewer (more) negotiators chose to share fine (coarse) information and thus minimize fairness based utility losses (maximize monetary gains).

Reviews the book "Research and Current Issues in Management Accounting," edited by Michael Bromwich and Anthony G. Hopwood.

[This study uses interference theory to test the hypothesis that exposure to cost and income measures causes fixated responses in a decision-making setting where market value is the appropriate response. These fixated responses have been observed in both the functional fixation and prospect theory literatures and are related to materiality and certainty. The number of accounting courses subjects had completed was used as a surrogate for amount of exposure to cost and income. Approximately 50 percent of the subjects exhibited evidence of fixation on either income or cost measures. Materiality, but not certainty, had an impact on the fixation. Exposure to accounting courses was not related to this fixation. In fact, weak support was found for accounting as an aid in encoding the correct (i.e., market value) response. Age was the only variable positively correlated with the improper use of cost and income data.]

This study uses interference theory to test the hypothesis that exposure to cost and income measures causes fixated responses in a decision-making setting where market value is the appropriate response. These fixated responses have been observed in both the functional fixation and prospect theory literatures and are related to materiality and certainty. The number of accounting courses subjects had completed was used as a surrogate for amount of exposure to cost and income. Approximately 50 percent of the subjects exhibited evidence of fixation on either income or cost measures. Materiality, but not certainty, had an impact on the fixation. Exposure to accounting courses was not related to this fixation. In fact, weak support was found for accounting as an aid in encoding the correct (i.e., market value) response. Age was the only variable positively correlated with the improper use of cost and income data.

Firms using sophisticated capital budgeting techniques (i.e., those that employ present value analysis and account for risk) should theoretically perform better than firms using naive models such as the payback period or accounting rate of return. However, previous empirical work examining this question has produced mixed results. To correct for limitations in these studies, several tests were conducted on firms that adopted sophisticated selection techniques versus a control group of firms that employed naive techniques. After controlling for differences in systematic risk, industry effects, and size, interrupted time-series tests of relative market returns were performed. Based on the results of this study we conclude that the adoption of sophisticated capital budgeting selection techniques will not, per se, result in superior firm performance. It is possible that the adoption of sophisticated selection techniques is one of many policies the firm pursues in the face of economic stress, and this, in combination with other policies, may help to bring about economic recovery for the firm.

[Firms using sophisticated capital budgeting techniques (i.e., those that employ present value analysis and account for risk) should theoretically perform better than firms using naive models such as the payback period or accounting rate of return. However, previous empirical work examining this question has produced mixed results. To correct for limitations in these studies, several tests were conducted on firms that adopted sophisticated selection techniques versus a control group of firms that employed naive techniques. After controlling for differences in systematic risk, industry effects, and size, interrupted time-series tests of relative market returns were performed. Based on the results of this study we conclude that the adoption of sophisticated capital budgeting selection techniques will not, per se, result in superior firm performance. It is possible that the adoption of sophisticated selection techniques is one of many policies the firm pursues in the face of economic stress, and this, in combination with other policies, may help to bring about economic recovery for the firm.]