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This paper develops a theory of inter-company price or pricing (ICP) within the framework of monopoly competition as a form of imperfect rivalry and performs an analytical application showing its direct association with corporate financial reporting in general and corporate financial statements in particular. For this purpose, cost advantage and operating profit are served as catalysts to build the theory and apply it into accounting practice. In other words, cost advantage and operating profits are considered and constructed as keys to show and explain the interplay between ICP and corporate financial reporting in general and corporate financial statements in particular. Examinations document that given that businesses transact with each other under bilateral monopoly competition; ceteris paribus, the operating profit figure of the business with cost advantage will be higher than the operating profit (OP) figure of the business without cost advantage. Examinations further document that businesses transact with each other under bilateral monopoly competition; ceteris paribus, asset size, earnings before interest and taxes (EBIT), earnings before taxes (EBT) and hence net income/profit after tax (NPAT) figures of the business with cost advantage will always be higher than asset size, EBIT, EBT and therefore NPAT figures of the business without cost advantage.
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Research question: Utilizing the tenets of oligopoly competition that is a well-known type of imperfect rivalry, this study is interested in building a financial theory of inter-company price or pricing (ICP) economics and documenting its direct affinity with corporate financial reporting in general and corporate financial statements in particular. It is also interested in executing an analytical application unveiling the straight linkage of ICP with financial disclosure. Motivation: There is an extant body of literature that examines different ICP structures for different companies and industries or markets. However, the literature is silent in corroborating any explicit association that we argue and show does exist between ICP and accounting. To the best of our knowledge, this is the first study to break this silence. Idea: Cost advantage and operating profit are exploited to do the theorization and accounting implementation, by justifying the linkage between ICP and business financial statements. Findings: Investigations show that given that businesses transact or compete with each other at arm’s length terms under oligopoly competition with a Stackelberg game; ceteris paribus, the operating profit figure of the business with cost advantage will be higher than the operating profit figure of the business without cost advantage. Investigations also show that given that businesses transact or compete with each other at arm’s length terms under oligopoly competition with a Stackelberg game; ceteris paribus, asset size, earnings before interest and taxes (EBIT), earnings before taxes (EBT) and hence net income/profit after tax (NPAT) figures of the business with cost advantage will always be higher than asset size, EBIT, EBT and therefore NPAT figures of the business without cost advantage. Investigations further suggest that given that businesses transact or compete with each other at arm’s length terms under oligopoly competition with a Cournot game where there is neither any cost advantage nor disadvantage one way or the other; ceteris paribus, the operating profit, asset size, EBIT, EBT and NPAT figures of the interacting business among the others will be identical.
It is well known that the commitment of manipulation act which is one of the factors significantly worsening the impairment of the corporate financial (mis)reporting process through the impairment of the market efficiency has strong accounting, financial, legal and economic linkages altogether. However, these linkages or ties have not yet attained the attention it deserves in the literature. This paper mainly aims to theoretically investigate the interplay among the cited disciplines and to lay it out on a more solid ground. In so doing, it strives to cover up this directed loophole the extant literature features to a reasonably certain degree, through crystallizing the significance and context of manipulation. This paper clearly documents that there is a need to broaden the definition of manipulation concept in a way to encompass financial statements for the bona fide investors or users of corporate financial information may not be harmed by the (public) companies to commit such offenses around. In other words, this study shows that comprehensive financial regulations to better address the current needs that will bring together much better accounting practices as well as economic and financial system.
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