Full-Cost Transfer Pricing and Cost Management

2016 ◽  
Vol 28 (3) ◽  
pp. 63-81 ◽  
Author(s):  
Jan Bouwens ◽  
Bert Steens
Keyword(s):  
Cost Management ◽  
Transfer Pricing ◽  
Data Availability ◽  
Credible Commitment ◽  
Risk Of Falling ◽  
Full Cost ◽  
Cost Cutting ◽  
Death Spiral ◽  
Transfer Prices ◽  
Jel Classifications

ABSTRACT Full-cost transfer pricing has been criticized for providing production units with insufficient incentives to economize. Our empirical study based on data from a large producer of consumer goods shows that charging full-cost transfer prices to downstream sales units can send upstream production units into a death spiral. However, our results also suggest that production units reduce costs to prevent the death spiral. We observe that managers focus their cost-cutting efforts on unit variable costs and on products with the best sales prospects. These results also suggest that, when production units are at risk of falling into a death spiral, full-cost transfer pricing can serve as a credible commitment device to motivate managers to reduce costs. JEL Classifications: D24; M31; M41; M50. Data Availability: We were given the opportunity to work with a company's proprietary database that contains sensitive and classified data that cannot be disclosed due to a non-disclosure agreement. At the start of our research, the company agreed to be referred to as Carepro, which is fictitious and does not correspond to any other existing company with that same or a similar name.

scholarly journals Capacity Rights and Full-Cost Transfer Pricing

2020 ◽  
Author(s):  
Sunil Dutta ◽  
Stefan Reichelstein
Keyword(s):  
Transfer Pricing ◽  
Productive Capacity ◽  
Present Value ◽  
Control Rights ◽  
Transfer Payments ◽  
Full Cost ◽  
Initial Acquisition ◽  
Pricing Rules ◽  
Transfer Prices ◽  
Capacity Acquisition

This paper examines the theoretical properties of full-cost transfer prices in multidivisional firms. In our model, divisional managers are responsible for the initial acquisition of productive capacity and the utilization of that capacity in subsequent periods, once operational uncertainty has been resolved. We examine alternative variants of full-cost transfer pricing with the property that the discounted sum of transfer payments is equal to the initial capacity acquisition cost and the present value of all subsequent variable costs of output supplied to a division. Our analysis identifies environments where particular variants of full-cost transfer pricing induce efficiency in both the initial investments and the subsequent output levels. Our findings highlight the need for a proper integration of intracompany pricing rules and divisional control rights over capacity assets. This paper was accepted by Suraj Srinivasan, accounting.

Interim Reporting Frequency and the Mispricing of Accruals

2018 ◽  
Vol 32 (3) ◽  
pp. 29-47
Author(s):  
Shou-Min Tsao ◽  
Hsueh-Tien Lu ◽  
Edmund C. Keung
Keyword(s):  
Financial Reporting ◽  
Stock Prices ◽  
Data Availability ◽  
Financial Reports ◽  
Regulatory Changes ◽  
Sample Composition ◽  
Reporting Frequency ◽  
Over Time ◽  
Jel Classifications ◽  
Accrual Mispricing

SYNOPSIS This study examines the association between mandatory financial reporting frequency and the accrual anomaly. Based on regulatory changes in reporting frequency requirements in Taiwan, we divide our sample period into three reporting regimes: a semiannual reporting regime from 1982 to 1985, a quarterly reporting regime from 1986 to 1987, and a monthly reporting regime (both quarterly financial reports and monthly revenue disclosure) from 1988 to 1993. We find that although both switches (from the semiannual reporting regime to the quarterly reporting regime and from the quarterly reporting regime to the monthly reporting regime) hasten the dissemination of the information contained in annual accruals into stock prices and reduce annual accrual mispricing, the switch to monthly reporting has a lesser effect. Our results are robust to controlling for risk factors, transaction costs, and potential changes in accrual, cash flow persistence, and sample composition over time. These results imply that more frequent reporting is one possible mechanism to reduce accrual mispricing. JEL Classifications: G14; L51; M41; M48. Data Availability: Data are available from sources identified in the paper.

Tax-Advantaged Trust Use Among IPO Executives: Determinants and Implications for Valuation and Future Performance

2019 ◽  
Vol 95 (3) ◽  
pp. 145-175 ◽  
Author(s):  
Michael J. Dambra ◽  
Matthew Gustafson ◽  
Phillip J. Quinn
Keyword(s):  
Stock Price ◽  
Relevant Information ◽  
Data Availability ◽  
Market Prices ◽  
The Public ◽  
Future Performance ◽  
Estate Taxes ◽  
Price Appreciation ◽  
One Year ◽  
Jel Classifications

ABSTRACT We examine the prevalence and determinants of CEOs' use of tax-advantaged trusts prior to their firm's IPO. Twenty-three percent of CEOs use tax-advantaged pre-IPO trusts, and share transfers into tax-advantaged trusts are positively associated with CEO equity wealth, estate taxes, and dynastic preferences. We project that pre-IPO trust use increases CEOs' dynastic wealth by approximately $830,000, on average. We next examine a simple model's prediction that trust use will be positively related to IPO-period stock price appreciation. We find that trust use is associated with 12 percent higher one-year post-IPO returns, but is not significantly related to the IPO's valuation, filing price revision, or underpricing. This evidence is consistent with CEOs' personal finance decisions prior to the IPO containing value-relevant information that is not immediately incorporated into market prices. JEL Classifications: D14; G12; G32; M21; M41. Data Availability: Data are available from the public sources cited in the text.

Concurrent Earnings Announcements and Analysts' Information Production

2019 ◽  
Vol 95 (1) ◽  
pp. 165-189 ◽  
Author(s):  
Matthew Driskill ◽  
Marcus P. Kirk ◽  
Jennifer Wu Tucker
Keyword(s):  
Earnings Announcements ◽  
Financial Analysts ◽  
Earnings Forecasts ◽  
Data Availability ◽  
Limited Attention ◽  
Conference Calls ◽  
Stock Recommendations ◽  
Rich Information ◽  
Sample Firm ◽  
Jel Classifications

ABSTRACT We examine whether financial analysts are subject to limited attention. We find that when analysts have another firm in their coverage portfolio announcing earnings on the same day as the sample firm (a “concurrent announcement”), they are less likely to issue timely earnings forecasts for the sample firm's subsequent quarter than analysts without a concurrent announcement. Among the analysts who issue timely earnings forecasts, the thoroughness of their work decreases as their number of concurrent announcements increases. In addition, analysts are more sluggish in providing stock recommendations and less likely to ask questions in earnings conference calls as their number of concurrent announcements increases. Moreover, when analysts face concurrent announcements, they tend to allocate their limited attention to firms that already have rich information environments, leaving behind firms in need of attention. Overall, our evidence suggests that even financial analysts, who serve as information specialists, are subject to limited attention. JEL Classifications: G10; G11; G17; G14. Data Availability: Data are publicly available from the sources identified in the paper.

Come on Over: Analyst/Investor Days as a Disclosure Medium

2016 ◽  
Vol 91 (6) ◽  
pp. 1725-1750 ◽  
Author(s):  
Marcus P. Kirk ◽  
Stanimir Markov
Keyword(s):  
Information Content ◽  
Short Duration ◽  
Price Impact ◽  
Senior Management ◽  
Data Availability ◽  
Market Participants ◽  
Temporal Proximity ◽  
Conference Presentations ◽  
Close Temporal Proximity ◽  
Jel Classifications

ABSTRACT Our study introduces analyst/investor days, a new disclosure medium that allows for private interactions with influential market participants. We also highlight interdependencies in the choice and information content of analyst/investor days and conference presentations, a well-researched disclosure medium that similarly allows for private interactions. Analyst/investor days are less frequent, but with longer duration and greater price impact than conference presentations. They are mostly hosted by firms that already have opportunities to interact with investors at conferences, but whose complex and diverse activities make the short duration and rigid format of a conference presentation an imperfect solution to these firms' information problems. Analyst/investor days and conference presentations tend to occur in different quarters, consistent with their competing for the time and attention of senior management. When these two mediums are scheduled in close temporal proximity to each other, analyst/investor days diminish the information content of conference presentations, but not vice versa, consistent with managers' favoring analyst/investor days over conference presentations as a disclosure medium. JEL Classifications: D82; M41; G11; G12; G14. Data Availability: Data are publicly available from the sources identified in the paper.

Auditors and the Principal-Principal Agency Conflict in Family Controlled Firms

2020 ◽  
Vol 39 (4) ◽  
pp. 31-55
Author(s):  
Chiraz Ben Ali ◽  
Sabri Boubaker ◽  
Michel Magnan
Keyword(s):  
Risk Assessment ◽  
Negative Relationship ◽  
Audit Fees ◽  
Data Availability ◽  
Audit Risk ◽  
Controlling Shareholder ◽  
Voting Power ◽  
The Public ◽  
Agency Conflict ◽  
Jel Classifications

SUMMARY This paper examines whether multiple large shareholders (MLS) affect audit fees in firms where the largest controlling shareholder (LCS) is a family. Results show that there is a negative relationship between audit fees and the presence, number, and voting power of MLS. This is consistent with the view that auditors consider MLS as playing a monitoring role over the LCS, mitigating the potential for expropriation by the LCS. Therefore, our evidence suggests that auditors reduce their audit risk assessment and audit effort and ultimately audit fees in family controlled firms with MLS. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G32; G34; M42; D86.

The Association between Audit Manager and Auditor-In-Charge Experience, Effort, and Risk Responsiveness

2018 ◽  
Vol 38 (3) ◽  
pp. 121-147 ◽  
Author(s):  
Christine Contessotto ◽  
W. Robert Knechel ◽  
Robyn A. Moroney
Keyword(s):  
Audit Quality ◽  
Data Availability ◽  
The Core ◽  
Specific Experience ◽  
Primary Core ◽  
Using Data ◽  
Audit Team ◽  
Industry Experience ◽  
Jel Classifications ◽  
Core Role

SUMMARY Audit quality is dependent on the experience and effort of the audit team to identify and respond to client risks (risk responsiveness). Central to each team are the core role holders who plan and execute the audit. While many studies treat the partner as the primary core role holder, the manager and auditor-in-charge (AIC) are also important. Using data for engagements from two midtier firms, we analyze the association between the experience and relative effort of the manager and AIC and risk responsiveness. We find a manager's client-specific experience is associated with risk responsiveness for non-listed clients but find no evidence that the general or industry experience of a manager, or the experience of the AIC, is associated with risk responsiveness. The client-specific experience and relative effort of the partner is associated with risk responsiveness. These results suggests that managers can provide an important, albeit limited, contribution to the audit. JEL Classifications: M2. Data Availability: The data were made available to the researchers on the understanding that they will remain confidential.

scholarly journals Substitution across profit shifting methods and the impact on thin capitalization rules

2021 ◽  
Author(s):  
Gideon Goerdt ◽  
Wolfgang Eggert
Keyword(s):  
Multinational Firms ◽  
Transfer Pricing ◽  
Multinational Firm ◽  
Profit Shifting ◽  
Goods And Services ◽  
Internal Goods ◽  
Transfer Prices ◽  
Debt Shifting ◽  
The Impact ◽  
Thin Capitalization

AbstractThin capitalization rules limit firms’ ability to deduct internal interest payments from taxable income, thereby restricting debt shifting activities of multinational firms. Since multinational firms can limit their tax liability in several ways, regulation of debt shifting may have an impact on other profit shifting methods. We therefore provide a model in which a multinational firm can shift profits out of a host country by issuing internal debt from an entity located in a tax haven and by manipulating transfer prices on internal goods and services. The focus of this paper is the analysis of regulatory incentives, $$(i)$$ ( i ) if a multinational firm treats debt shifting and transfer pricing as substitutes or $$(ii)$$ ( i i ) if the methods are not directly connected. The results provide a new aspect for why hybrid thin capitalization rules are used. Our discussion in this paper explains why hybrid rules can result in improvements in welfare if multinational firms treat methods of profit shifting as substitutes.

scholarly journals Do Government Regulations Prevent Transfer Pricing Manipulations?

2011 ◽  
Vol 4 (10) ◽  
Author(s):  
Canri Chan
Keyword(s):  
Multinational Corporations ◽  
Transfer Pricing ◽  
Cash Flows ◽  
Transfer Price ◽  
Tax Rates ◽  
Performance Measurements ◽  
Government Regulations ◽  
Transfer Prices ◽  
Profit Performance ◽  
Efficient Allocations

This study investigated the effects of government regulations and incentives on the setting of transfer prices. I found significant main effects of both variables on transfer price choices. Transfer pricing is important, particularly for Multinational Corporations (MNCs), because of increased trends toward globalization of business activities and, simultaneously, decentralization. These trends have led to increased pressures for sound internal pricing systems, specifically transfer pricing, in order for organizations to ensure optimal and efficient allocations of organization resources and to provide profit performance measurements (Tang 1992). It has generally been recognized in the literature that in order to maximize after tax cash flows, MNCs shift profits from high to low tax jurisdictions. Governments in some countries, particularly those with high tax rates, are greatly concerned as to whether or not companies attempt to avoid tax liabilities via transfer pricing manipulation, specifically in terms of trying to shift profits to lower tax jurisdictions, and have enacted laws to limit transfer price choice.

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