The Role of Organizational Design for Business Unit Collaboration and a Bargaining Opponent’s Emotions on Transfer Pricing Judgments

Abstract

While accounting research has demonstrated the role of a decision maker’s own emotions in various judgments, emerging psychology research proposes that others’ emotions provide an informational signal that can be used to assess an opponent’s limits and cooperativeness in a bargaining situation. We examine how a bargaining opponent’s emotions can provide information signals that can be used by a selling division manager during transfer pricing decisions and whether organizational design choices by corporate management to foster cooperation can create a context that influences how managers react to these signals. In an experiment, under weak corporate management pressure to work internally (less collaborative environment), managers’ selling price estimates were more conciliatory when the opponent was described as displaying negative emotions than when described as displaying positive emotions. However, when there was strong corporate management encouragement to work internally (more collaborative environment), managers’ selling price estimates were more conciliatory when the opponent displayed positive rather than negative emotions. A multiple mediation analysis suggests that corporate policies for business unit collaboration can change which information signal (cooperativeness or others’ limits) mediates the relationship between opponent’s emotions and the transfer pricing decision. As such, not only do we extend both accounting and psychology research by lending insight into the context dependency of opponents’ emotions under various organizational design structures, but we also lend insight into the causal mechanism by which the emotional displays influence transfer pricing judgments. These results have implications for unit profitability, divisional resource allocation, and management accounting practices.

JEL Classification: C91, D20