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A COMPARATIVE INVESTIGATION OF TRANSFER PRICING PRACTICES IN SELECTED INDUSTRIES This study investigated the transfer pricing practices of selected chemical and electronic companies with

A COMPARATIVE INVESTIGATION OF TRANSFER PRICING PRACTICES IN SELECTED INDUSTRIES

By Nick W McGaughey

A DISSERTATION

Submitted to School of Business and Entrepreneurship Nova Southeastern University

in partial fulfillment of the requirements

for the degree of

DOCTOR OF BUSINESS ADMINISTRATION

1997

UMI Number: 9801860

Copyright 1998 by McGaughey, Nick W

All rights reserved

UMI Microform 9801860 Copyright 1997, by UMI Company All rights reserved This microform edition is protected against unauthorized copying under Title 17, United States Code

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A COMPARATIVE INVESTIGATION OF TRANSFER PRICING PRACTICES IN SELECTED INDUSTRIES

By Nick W McGaughey

We hereby certify that this Dissertation submitted by Nick W McGaughey conforms to acceptable standards, and as such is fully adequate in scope and quality It is therefore approved as the fulfillment of the Dissertation requirements for the degree of Doctor of Business Administration

CERTIFICATION STATEMENT

| hereby certify that this paper constitutes my own product, that where the language of others is set forth, quotation marks so indicate, and that appropriate credit is given where | have used the language, ideas, expressions or writings

of another

2 ¿ 7 Nick W McGaughey

A COMPARATIVE INVESTIGATION OF TRANSFER PRICING PRACTICES IN SELECTED INDUSTRIES

This study investigated the transfer pricing practices of selected chemical and electronic companies with domestic and international businesses It

extended the previous research and analyses on the contingency theory to identify specific factors that are commonly used by firms to establish transfer prices An objective was to determine if any consistent differences exist across the two industries examined

There was only one primary research question What are the important factors that influence the design and operation of transfer pricing systems in selected industries? The study examined the contingent variables of

environmental factors, interdependency factors, and organizational factors, and their influence on transfer pricing practices

The main research methodology was a questionnaire survey Data

conceming transfer pricing and business characteristics were collected and analyzed from U S chemical and electronic firms

The study found that there were no significant differences between the orientations used by these chemical and electronic firms Organizational factors plus international and domestic environmental variables vary among the

companies This yields different, yet appropriate transfer pricing decisions for each firm The study concluded that contingency theory applies to a firm's

choice of transfer pricing method Each company selects a method that best fits its needs and circumstances

Comments and questions on this publication should be directed to

Nick McGaughey at P O Box 110241, Nashville, Tennessee, 37222-0241

LIST OF TABLES

LIST OF FIGURES

Chapter

I INTRODUCTION

Overview and Definitions

Background on the Study

Statement of the Problem

Purpose and Limitations of the Study

Significance of the Study

Organization of the Remaining Chapters

i REVIEW OF LITERATURE

Contingency Theory

Transfer Pricing in General

Prior Empirical Research

IV ANALYSIS AND PRESENTATION OF FINDINGS

Characteristics of Responding Companies

Transfer Pricing Methods

Transfer Pricing Systems

Responses to the Survey

Total Revenues of Respondents

Number of Foreign Countries Where Respondents Had

Divisions

Exports to Foreign Divisions by Respondents

Countries Accounting for Largest Exports to Foreign

Imports from Foreign Divisions by Respondents

Countries Accounting for Largest Imports from Foreign

Interdivisional Transfers as Percentages of Total Revenues of

Respondents

The Use of Transfer Prices

Reasons for Not Using Transfer Prices

Dominant Method Used for Domestic Transfers

Number of Domestic Transfer Pricing Methods Used

Dominant Method Used for International Transfers

Number of International Transfer Pricing Methods Used

Comparison of Authority for Setting Transfer Pricing Policies

Comparison of Ways Policy Disagreements Were Settled

Comparison of Transfer Pricing Objectives

Comparison of Outside Sourcing Policies

Relationship Between Industry and Domestic Transfer

Pricing Methods

Relationship Between Industry and International Transfer

Pricing Methods

Relationship Between Size and Domestic Transfer Pricing

Method for Electronic Companies

Relationship Between Size and Domestic Transfer Pricing

Method for Chemical Companies

Relationship Between Size and International Transfer

Pricing Method for Electronic Companies

Relationship Between Size and Internationa! Transfer

Pricing Method for Chemical Companies

Rank Order and Mean Rating of Importance of Situational

Figure Page

1 Domestic Transfer Pricing Choice Model 19

2 International Transfer Pricing Choice Model 21

CHAPTER | INTRODUCTION

Overview and Definitions

This study was performed to determine the important factors that influence the design of transfer pricing systems in domestic and international operations

The factors examined include location, industry, size, and other environmental

and organizational variables The research investigated the connections and determinations between transfer pricing practices and company characteristics and situations

The survey research used a mail questionnaire Data were collected from U.S electronic and chemical companies that have domestic and foreign

businesses These data were subjected to statistical procedures to examine relationships, differences, and correlations

A general definition for transfer pricing is the price charged by one division

of an organization for a product or service that it provides to another division of the same organization (Homgren & Foster, 1991) A division includes

terminology, such as subsidiaries, segments, profit centers, and business units Eight major transfer pricing methods are none, cost-based, market-based,

negotiated price, contribution approach, dual pricing, mathematical

programming, and different prices for different purposes (Tang, 1993)

Management accounting and controls are contingent on various external and internal factors Transfer pricing systems are one aspect of management accounting and controls The contingency theory approach states that firms choose transfer pricing systems based on what are perceived as optimal in their particular situation

The results of recent empirical research have highlighted the transfer pricing methods actually used by companies Some reasons have been

advanced to explain the choice of a particular method This study attempted to identify and compare those variables affecting the choice of firms in the U.S electronic and chemical industries for their domestic and foreign operations These technology-based industries were selected because they are large and are among the most competitive and global of sectors As a result, their companies are leaders not just in technology, but also in management practice

This is necessary for their survival.

Statement of the Problem

There was only one primary research question What are the important factors that influence the design and operation of transfer pricing systems in selected industries? The study examined the contingent variables of

environmental factors, interdependency factors, and organizational factors, and their influence on transfer pricing practices

This was accomplished by examining the following seven questions, which support the primary research question:

1 Does the extent of application of cost-oriented or non-cost-oriented domestic transfer prices among electronic and chemical

companies vary according to the industry of these firms?

2 Does the extent of application of cost-oriented or non-cost-oriented international transfer prices among electronic and chemical

companies vary according to the industry of these firms?

3 Is the extent of usage of non-cost-oriented transfer prices for

domestic interdivisional transfers among electronic companies

related to the size of these companies?

4 Is the extent of usage of non-cost-oriented transfer prices for

domestic interdivisional transfers among chemical companies

related to the size of these companies?

international interdivisional transfers among electronic companies related to the size of these companies?

6 Is the extent of usage of non-cost-oriented transfer prices for

international interdivisional transfers among chemical companies related to the size of these companies?

7 Is there significant difference between the absolute importance placed upon each of the major environmental and organizational variables by electronic and chemical companies when they formulate their domestic and international transfer pricing policies?

Previous empirical studies have been deficient due to the absence of smaller firms and the lack of comparisons between industries This study

addressed those deficiencies.

Purpose and Limitations of the Study

The purpose of the study was to perform a comparative investigation of transfer pricing practices in selected industries, namely electronic and chemical Prior research has not specifically studied firms in certain industries to identify the situational determinants that influence the firm in selection of a particular transfer pricing practice This study was an extension of previous work, not a replication

This study was limited to transfer pricing as it relates to domestic and international applications in electronic and chemical companies The study does not try to predict the choice of a transfer pricing method, but attempts to explain why certain methods have been chosen Additionally, the findings are generalizable only to the population from which the sample was drawn, namely chemical and electronic firms based in the United States

For convenience, the industries have been limited to two: chemical and electronic One reason for selection of these two industries was that they are known by the researcher

The transfer pricing research questions considered in this study continue the stream of scholarly transfer pricing research Particularly, the empirical studies performed by Borkowski (1990, 1992) and Tang (1979, 1992)

This research makes a contribution to the existing knowledge by its

industry focus The focus was on the U.S electronic industry with comparison to the U.S chemical industry Understanding the variables that companies attempt

to consider in a transfer pricing choice is a critically important research issue and management concern

Transfer pricing is significant to both managers and their companies, since

it has an impact on company profits and performance evaluation of

organizational units The transfer pricing decision is a specific accounting

convention which has the potential to affect the company along many

dimensions Transfer pricing may affect competitiveness, control, taxes,

managerial performance, and allocation of firm resources Eccles (1985)

contends that approximately eighty percent of Fortune 1000 companies must address the issue of transfer pricing

Organization of the Remaining Chapters

The four forthcoming chapters cover the literature review, research design, analysis, and summary The literature review consists of three topical areas: contingency theory, transfer pricing in general, and prior empirical research This research drew upon an extensive body of literature in the form of books, articles, monographs, and statistical publications

The research design chapter discusses the research process involving hypotheses and survey questions, data sources and collections, and statistical methods The questionnaire and cover letters, which are central to the

methodology, are contained in the appendices

Then, the analysis chapter presents the outcomes from the mail survey Lastly, the summary chapter outlines the results, implications, and related areas

for future research.

REVIEW OF LITERATURE

The research foundations related to this study are considered This is followed by a synthesis of the relevant empirical literature The empirical

literature covers thirteen research studies focusing on the situational

determinants of transfer pricing practices

Contingency Theory

The purpose of this research is to examine factors that influence the design and operation of transfer pricing systems Since a contingency theory-based approach is being developed, a brief introduction to this base theory is given The contingency model elaborated by Lawrence and Lorsch (1967) offers

a theory for understanding the way in which the nature of the environment

influences an organization Thompson (1967) contended that differences in technological and environmental dimensions result in differences in structures, Strategies, and decision processes between similar organizations

Consequently, the specific objectives are contingent on the situational factors unique to each firm

Contingency theories state that the appropriateness of different strategies depend on the competitive settings of businesses (Hambrick & Lei, 1985) They are based on the contention that no universal set of choices exists that is

optimal for all businesses regardless of their resource and environmental

8

positions (Ginsberg & Venkatraman, 1985) Effective strategies or policies are defined as those which achieve a fit or congruence between environmental conditions and organizational factors (Venkatraman & Camillus, 1984) A transfer pricing policy should achieve goal congruence (Abdallah, 1989)

Hayes (1977) investigated contingency theory applied to management accounting That study examined the contingent variables of environmental factors, interdependency factors, and internal factors, and their influence on departmental effectiveness Schweikart (1985) developed a general

managerial accounting model based on contingency theory Jones (1985) integrated the prior literature on accounting and contingency theory to establish the two major classes of influential variables: environmental and internal

Contingency theory appears to be an accepted and used theory It has been previously applied to management accounting and transfer pricing

research Examples are Borkowski (1990, 1992) and Yunker (1983) Borkowski adapted the general Schweikart model, adding research by Birnberg and

Shields (1984), to address the specific decision of choosing a transfer pricing

method in domestic and international operations

Borkowski (1990) investigated the organizational and environmental

factors influencing a firm's choice of a transfer pricing method The results of that research support the contingency theory approach in which firms choose a transfer pricing method based on what is perceived as optimal in their particular situation Yunker (1983) contends that the survey evidence supports her

working hypothesis that corporate policy (including transfer pricing policy) is

systematically related to company characteristics and environment

Transfer Pricing in General

Anthony (1988) defines management controls as the process by which

managers influence other members of the organization to implement the

organization's strategies Management controls are contingent on various

external and internal factors Transfer pricing systems are one aspect of

management controls

The transfer pricing literature can be divided into two broad categories:

methods and applications Transfer pricing methods discussed include cost

based, market or non-cost based, negotiated prices, and dual pricing Transfer pricing applications were covered in marketing, organization and management, behavioral science, business strategy, international business, economics,

taxation, and accounting and control (Tang, 1993)

There are very few references to transfer pricing until the most recent 40 years In the midfifties, Cook (1955), Dean (1955), and Stone (1956) published articles on transfer pricing that described the range of available practices (full cost, market price, negotiated price, and standard cost) and advocated a

preferable one In a classic article, Hirschleifer (1956) developed the

microeconomic foundations of the transfer pricing problem and demonstrated in

a narrow situation the advantage of using the opportunity cost of the selling

division as the appropriate transfer price

11

Many academic researchers have investigated transfer pricing issues

since 1970 A study by Arpan (1972) was one of the earliest attempts to

consider the multiple variables and decisions which a company must address in the selection of a transfer pricing method Arpan found differences according to the host country of the parent firm Also, there were distinct preferences for

particular methods according to country

Despite the large volume of published material on transfer pricing, three publications provide an excellent compilation and review of this academic

research Abdel-khalik and Lusk (1974) provide a detailed discussion of the

theoretical issues and a concise coverage detailing the knowledge of transfer pricing in 1974 Grabski (1985) compiled a detailed integration of the empirical and analytical literature from 1974 to 1983 relating to transfer pricing with focus

on decentralization of organizations and organizational optimization issues

Leitch and Barrett (1992) provide a summary of intemational transfer pricing

factors appearing in prior empirical, economic, and mathematical modeling

research

Abdallah (1989) has synthesized the theoretical and practical literature to provide a set of decision-making guidelines for multinational companies

Abdallah argues that multinationals are faced with creating a transfer pricing

policy that does not conflict with internal objectives such as performance

evaluation, motivation, and goal congruence, and external factors such as taxes

and tariffs, cash transfer restrictions, foreign currency risk, and foreign

government intervention It is important to consider which factors are most

critical in their transfer pricing decision This can explain how companies

pursuing different objectives can select the same transfer pricing method

No general theory of transfer pricing has emerged from this research with a comprehensive list of relevant factors Consequently, research continues to

examine those factors that company managers believe are relevant to transfer pricing decisions

Surveys provide a more complete investigation of transfer pricing factors and they are useful in categorizing key variables These surveys typically focus

on managers’ perceptions of the relative importance of various market

imperfections in their transfer pricing decisions Market imperfections are

generally called environmental factors or determinants in these empirical

studies

Prior Empirical Research

Table 1 shows the primary research focus for thirteen empirical studies

focusing on the determinants of the transfer pricing method These survey

studies represent the core literature with contingency theory as the base theory They have helped to identify relevant contingent variables and suggest

hypotheses regarding the major relationships among the variables These

thirteen research studies are discussed in this section

Wu and Sharp (1979) conducted one of the first empirical studies on actual transfer pricing practices using statistical analyses They were concerned with the determinants of international and domestic transfer pricing practices of

What are the constituents of the international transfer pricing decision?

What are the techniques for and uses of transfer pricing?

Which environmental variables affect transfer pricing decisions?

What are the factors in the determination of subsidiary autonomy, performance evaluation, and transfer pricing?

What are the transfer pricing practices of domestic companies?

What are the determinants of transfer pricing practices?

Primarily market-based for management control The specific foreign country and taxes

Both autonomy and evaluation are related

to market-based transfer pricing

Market-based prices for evaluation/motivation

Company strategy and administrative process

(table continues)

Is the transfer pricing method

related to the level in the firm

at which the decision is made?

What is the influence of

environmental and firm-specific

variables on the selection of

transfer pricing strategies?

What are the organizational and environmental variables affecting the domestic transfer pricing method?

What are the relationships of

internal issues, the external

environment, and the transfer pricing policy and methodology?

What are the organizational and international factors influencing the choice of a transfer pricing

method?

What are the environmental

variables affecting transfer pricing?

General Findings

Most decisions are made at divisional level selecting market based Legal and size

variables are associated with market-based pricing Size, objectives, degree

of decentralization, and environmental variability and favorabieness

corporate structure and

strategy, taxes, and

competitive pressures drive market selection Government regulation, currency stability, profit

measurement, and

implementation

Tax differences, repatriation restrictions, and objectives

Kim and Miller (1979) surveyed 342 multinational corporations with a

parent company in the United States and operating units in eight developing countries From the responses, they ranked nine factors on the basis of their relative importance for these eight countries and these rankings show great

similarity across these developing countries According to Kim and Miller,

developing countries make significant use of repatriation restrictions, exchange controls, and joint venture restrictions to control the outflow of capital, which

they suggest is different from the findings of past research on developed

countries They conclude that many factors inherent in the developing countries play a role in transfer pricing practices

Benke and Edwards (1980) argue that transfer pricing is a system within the management control process Therefore, transfer pricing techniques used

by any company must support the two major objectives of management control: goal congruence and performance evaluation They found that the primary

transfer pricing techniques used by the firms in their study were market-based ones They suggest that an appropriate transfer pricing technique should

promote profit maximization, enhance performance evaluation, and recognize the fundamental differences between the objectives of the various tax

authorities and those of corporate transfer pricing

Burns (1980) studied the effect of fourteen environmental variables on

transfer pricing decisions Market conditions in a foreign country, competition in

a foreign country, reasonable profit for the foreign operations, and U.S federal taxes were the most important factors in making international pricing decisions The findings from a factor analysis of the data indicated dimensions that

account for preferences for different variables These five factors were intemal foreign environment, influences on cash flow, artificial governmental barriers, domestic and foreign taxes, and economic structure of the foreign country

Yunker (1983) studied three policy dimensions of multinational!

corporations: subsidiary autonomy, performance evaluation, and transfer

pricing On the relationships between subsidiary autonomy and transfer pricing, the study found that market-based transfer pricing was related to subsidiary

autonomy

On the relationships between performance evaluation and transfer pricing, the study discovered that profit-driven performance evaluation is related with

market-based transfer pricing When transfer pricing is a tool for overall

corporate profit enhancement, the company tends to modify its performance

evaluation to decrease emphasis on the profit criterion at the subsidiary level

(Yunker, 1983)

Seventy-four Fortune 500 companies responded to a survey by Price

Waterhouse (1984) There were four key findings Performance evaluation was the primary reason given for using a transfer pricing system Managerial

motivation was the second most frequently cited objective of the transfer pricing

17 system Those companies that did not adopt a transfer pricing system often cited cost as the major factor influencing their decision The majority of the

responding companies reported that they used market-based transfer prices The research by Eccles (1985) concluded that transfer pricing policies are

an integral aspect of strategy implementation and that effective management of these policies requires careful attention to administrative processes Therefore, the two principal determinants of transfer pricing practices are strategy and

administrative process Transfer pricing practices affect economic decisions,

which in turn affect corporate performance Transfer pricing practices also affect performance measurement and management reward, which in tum affect

perceptions of fairness by individual managers Consequently, the fundamental difficulty in managing a transfer pricing system involves establishing practices that will lead to decisions that enhance corporate performance, while at the

same time measuring and rewarding divisional performance in a way that the managers perceive as fair

Hoshower and Mandel (1986) compiled survey data to determine which

level (division or corporate) in the company makes the transfer pricing decision and which method (cost or market) was generally selected Eighty percent of the firms reported that transfer pricing decisions are made at the divisional level

Sixty percent of the responding companies indicated that their interdivisional

transfer prices are market based

Al-Eryani, Alam, and Akhter (1990) examined the influence of

environmental and firm-specific variables on the selection of international

transfer pricing strategies The study results show that legal and size variables are associated with using market-based prices Economic restrictions were

either not important or secondary determinants of a market-based pricing

strategy

In a domestic transfer pricing study, Borkowski (1990) investigated the

environmental and organizational factors determining the choice of a transfer pricing method Borkowski found that different environmental and

organizational characteristics combine to identify the transfer pricing method used by a company Figure 1 (Borkowski, 1990) illustrates her domestic model

of transfer pricing choice within the firm

The nine organizational variables were company size, degree of conflict, extent of integration, firm objectives, management compensation, performance evaluation, firm profit orientation, manager participation in setting transfer price, and degree of decentralization Five organizational variables were consistently significant: company size, degree of conflict between managers, firm objectives

as bases of choice, manager participation in setting transfer prices, and degree

of decentralization The four environmental variables were existence of market

price, environmental variability, environmental! favorableness, and industry

With the environmental variables, environmental variability and environmental favorableness were significant (Borkowski, 1990)

The survey by Business International Corporation (1991) was designed to examine the relationship between internal issues such as corporate

characteristics, the external environment, and the transfer pricing policy and

Filter

How does information enter

the decision process

methodology used by multinational corporations The findings indicate that

factors, both internal and external to the company, play a key role in

determining a company's international transfer pricing policy The two most

important internal factors were organizational structure and corporate strategy The two dominant external factors were tax or accounting rule changes and

competitive pressures

The more important transfer pricing objectives of respondent firms included ensuring an arm's-length relationship, avoiding problems from tax authorities, minimizing worldwide taxes, and maximizing profits A medium level of

importance was attached to such objectives as convenient or simple to use,

appropriate for performance evaluation, and maximizing sales On pricing

methodologies for tangible products, the study found that market price was

ranked first The profit split method was the most popular method for intangibles (Business International Corporation, 1991)

Figure 2 (Borkowski, 1992) exhibits a model of international transfer

pricing choice within the firm Organizational and international environmental

variables will vary among the companies, leading to different yet appropriate

transfer pricing decisions for each firm Intemational transfer pricing requires

consideration of factors peculiar to intercountry transactions, such as local

taxes, tariffs, customs duties, and political considerations

Borkowski (1992) conducted a related survey addressing international

transfer pricing issues This survey researched the organizational and

international factors influencing a multinational corporation's choice of a

How does information enter

the decision process

International Variables

Size of Transfers Industry

Transfer Pricing Requirements Economic Stability

Economic Favorableness MNC Practices

IRS Section 482 Regulations

transfer pricing method International factors identified were government

regulations and currency stability, while organizational factors identified were implementation considerations, profit performance measurement, and the

extent of decentralization Borkowski concluded that the results of both studies support a contingency theory approach indicating that different methods will be optimal for different firms depending upon their individual characteristics

The major categories of transfer pricing methods are cost-based, market- based, and negotiated price A survey on transfer pricing practices among

Fortune 500 firms showed that more firms have adopted market-based transfer pricing techniques compared to cost-based ones This was during the period

from 1977 to 1990 (Tang, 1992)

Of the 143 responses in the 1990 survey, 132 firms used transfer pricing methods in domestic interdivisional transfers, while 90 companies used transfer pricing methods in international transfers The study revealed that the use of

transfer pricing policies by multinationals is influenced by the need to maintain overall profitability, by the existence of significant tax rate differentials between countries, and by foreign restrictions on profit repatriation (Tang, 1992)

The results of empirical research in transfer pricing show that the transfer pricing methods used in practice are not the methods which have theoretical

support in the accounting literature This divergence is partially explained by the differing motivational criteria of companies in choosing a transfer pricing

method, including profit maximization, performance evaluation of divisions, goal congruence, and the ease of understanding and the cost of administration for

23 the chosen method Generally, one method is chosen for domestic transfers to maximize profit, and another for intemational transfers to comply with tax and tariff regulations (Borkowski, 1992)

Conclusion

This review of prior empirical research has examined thirteen studies

dealing with academic and consultant research published over the period from

1979 to 1992 Only key studies that define the existing research foundations

were considered Various analytical studies are not included, nor are the many descriptive articles

A questionnaire survey was the methodology in each of the thirteen

research projects The respondents were generally larger American companies participating in a multitude of industries

These empirical survey results are informative and indicate that many

factors are considered in setting transfer prices The conclusion drawn from

these studies is that organizations manage transfer prices according to their

perceptions of how best to use various market imperfections The articles

suggest that company managers believe the identification of appropriate

transfer prices to be a complex management accounting and control task

Some consistencies exist between selected studies For example, Tang

(1992), Al-Eryani, Alam, and Akhter (1990), and Burns (1980) found that both

legal and taxation variables are important influences on transfer pricing

strategies Also, Borkowski (1990), Hoshower and Mandel (1986), and Yunker

(1983) found that larger firms use market-based transfer prices There were also

some disagreements between studies For instance, Al-Eryani, Alam, and

Akhter (1990) concluded that U.S multinationals conform to U.S tax

regulations, but Burns (1980) showed that transfer prices used by these

multinationals are frequently changed by the U.S Internal Revenue Service

These studies have helped to identify potential research strategies and

methodologies involving contingency theory and transfer pricing practices

However, the thirteen empirical studies have numerous limitations These

deficiencies include the absence of smaller firms and the lack of comparisons between industries

Figure 3 (Eccles, 1987; Otley, 1980) shows the transfer pricing process

Overall, this linear process consists of transfer pricing situational determinants, objectives, policy, and financial consequences This model should assist

academic researchers and company managers in their thinking about transfer pricing

Transfer Pricing

Financial Statement

25

METHODOLOGY

To provide an explanation regarding the environmental and organizational factors and their effect on influencing the selection of a transfer pricing method,

an empirical study was conducted The strategy of opinion research appeared

to be the best approach for achieving the multiple objectives of the study

Description

The technique of survey research using a questionnaire was chosen as the method to collect data Survey methods are good for testing hypotheses derived from theory (Fowler, 1984) The mail questionnaire is the best

instrument for a survey research study when attempting to gather detailed data from many firms when there are financial and time constraints (Isaac & Michael, 1981)

The questionnaire solicited objective responses and subjective

assessments All variables in the questionnaire were constructed from

suggestions in the literature and have been used before Each questionnaire had an accompanying individualized cover letter

26

27 Hypotheses

Table 2 shows the seven research hypotheses given in positive (Ha) and null form (Ho) Statistical analyses to test the hypotheses were performed on the null format

Hypotheses 1 and 2 deal with transfer pricing and industry variation, while hypotheses 3, 4, 5, and 6 address domestic and international transfer pricing and company size Hypothesis 7 investigated major environmental and

organizational variables and transfer pricing Specifically, differences between industries were investigated

The dependent variable of interest was the transfer pricing method

currently used The independent variables were certain environmental and

organizational variables The independent variables selected were comparable

to ones included in prior empirical studies

Table 3, following Table 2, lists these independent variables Some

independent variables were expected to affect the choice directly, while others affect the choice indirectly, contingent upon the firm's situation

The extent of application of cost-oriented or non-cost-oriented

domestic transfer prices among electronic and chemical

companies does not vary according to the industry of these firms

The extent of application of cost-oriented or non-cost-oriented

domestic transfer prices among electronic and chemical

companies does vary according to the industry of these firms

The extent of application of cost-oriented or non-cost-oriented

international transfer prices among electronic and chemical

companies does not vary according to the industry of these firms

The extent of application of cost-oriented or non-cost-oriented

international transfer prices among electronic and chemical

companies does vary according to the industry of these firms

The extent of usage of non-cost-oriented transfer prices for

domestic interdivisional transfers among electronic

companies is not related to the size of these companies

The extent of usage of non-cost-oriented transfer prices for

domestic interdivisional transfers among electronic

companies is related to the size of these companies

(table continues)

domestic interdivisional transfers among chemical companies

is not related to the size of these companies

The extent of usage of non-cost-oriented transfer prices for

domestic interdivisional transfers among chemical companies

is related to the size of these companies

The extent of usage of non-cost-oriented transfer prices for

international interdivisional transfers among electronic

companies is not related to the size of these companies

The extent of usage of non-cost-oriented transfer prices for

international interdivisional transfers among electronic

companies is related to the size of these companies

The extent of usage of non-cost-oriented transfer prices for

international interdivisional transfers among chemical

companies is not related to the size of these companies

The extent of usage of non-cost-oriented transfer prices for

international interdivisional transfers among chemical

companies is related to the size of these companies

There is no significant difference between the absolute importance

placed upon each of the major variables by electronic and chemical

companies when they formulate their transfer pricing policies

There is significant difference between the absolute importance

placed upon each of the major variables by electronic and chemical

companies when they formulate their transfer pricing policies