An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Sudip Bhattacharjee
Virginia Tech

Kimberly K. Moreno
University of Massachusetts at Amherst

Abstract: While prior accounting research has investigated the impact of equity on negotiated transfer prices, the role of inequity on sourcing decisions has not been examined. We propose that inequity perceived by buyers can lead to negative emotional reactions and cause managers to be more likely to source parts externally, even when the inequity is encountered in an unrelated transaction and it is economically attractive to source internally. More importantly, we extend prior accounting and psychology research on emotions by examining whether sellers will use information about the buyers’ emotions to design their own negotiation strategies during transfer pricing. Our results support our predictions and suggest that the residual negative affect from an unrelated transaction during transfer pricing can lead managers to make less economically advantageous decisions. In addition, the results highlight another aspect of emotions–the informational role of others’ emotions on accounting decision

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