Abstract Empirical research on transfer pricing has found a substantial difference between the actual methods used in practice and the methods discussed in the accounting literature. However, little explanation has been provided as to what influences the choice of the methods used in practice. The present research investigated the environmental and organizational factors influencing a firm's transfer pricing method choice. Data concerning transfer pricing policies and methods, as well as certain environmental and organizational characteristics, were gathered from manufacturing firms, and subsequently analyzed. The findings indicate that the presence of certain variables, particularly market price, does not imply the use of the market price method. Firms are using cost-based methods even when a market price for the transferred good is available. The results support the contingency theory approach to accounting, in which firms choose a method based on what is perceived as optimal in their particular situation. Other findings help resolve prior contradictory findings regarding firm size and the use and type of a bonus to proxy for performance evaluation measures.
Susan C. Borkowski (Sat,) studied this question.