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Title: Transfer pricing and trust. An embedded case study into the impact of trust on the ascertainment of transfer prices within decentralised firms.
Authors: Postma, Pieter
Issue Date: 1-Sep-2017
Publisher: Open Universiteit Nederland
Abstract: One of the major issues with transfer pricing is that decisions made by business unit managers may be in the best interest of his or her business unit, but not for other divisions or the organisation as a whole. Subsequently, top management of decentralised firms is facing a challenge in the determination of the degree of autonomy given to business unit managers. According to Chen et al. (2013), the purpose of decentralisation is jeopardised when top management interferes too much in the transfer pricing process. Conversely, in firms where a high level of transfer pricing autonomy is applied, division managers may make suboptimal decisions (opportunistic behaviour) resulting in underperformance for the entire organisation (Hilton 2011; Garrison et al., 2012). Quite some organisations are still struggling with the issue of how to manage their transfer pricing process and, inherent thereto, gain a better understanding of the determining factors influencing these internal transactions (Van Helden, Van der Meer-Kooistra & Scapens, 2001). A potentially overlooked field of study hereby is that of trust. In view of the preceding, and by means of a better understanding of the determining factors, this research study aims to answer the following research question: What is the impact of trust between managers on the ascertainment of transfer prices when there is a high degree of transfer pricing autonomy within the organisation? In an attempt to investigate the central research question, this study combines a thorough literature review with a qualitative embedded case study. Based on the results from the literature review and the results extracted from the empirical part of the research study, the central research question can be answered accordingly. Namely, the impact of trust between managers on the ascertainment of transfer prices is significantly high within organisations where managers can act autonomously within the transfer pricing process. Additionally, the collected secondary data resulted in some interesting insights. First, and foremost, the success of internal transactions depends strongly on the encountered mutual trust. Second, more transparency regarding budgets will highly benefit the success of an internal transaction. A majority of respondents confirmed that more transparency leads to more mutual trust, which in turn, leads to a more fruitful internal transaction. This is mainly because more information will be shared and fewer costs will be incurred through unnecessary controls. Following up on the previously mentioned conclusions it is of the utmost importance that decentralised firms start focussing on behavioural concepts such as trust. In addition, another important conclusion contains the experienced level of autonomy. Based on this conclusion, decentralised firms are recommended to maintain the arbitrary role of top management to the extent that the business unit’s autonomy is not jeopardised. By arriving at these aforementioned conclusions and recommendations, this research study provides significant additions to the growing body of knowledge in regard to transfer pricing practices. Finally, as with any research study, these findings and conclusions should be interpreted with several caveats in mind. For example, it is impossible to know whether, and to what extent, the findings from the embedded case study such as conducted at the KDVS Groep, is capable of being generalised. It should be acknowledged that many of the aspects of the KDVS Groep case are unique to this firm. Given this limitation, additional case studies would be valuable. These could involve further studies with regard to the influencing factors of the transfer pricing process within decentralised firms in other industries. Utilising a better understanding of these concepts and the influence thereof clearly contributes to a better manageable transfer pricing process, which in turn, results in a greater performance for the group of business units as a whole.
Appears in Collections:MSc Management Science

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