ABSTRACT: Using two free-communication bargaining games, this study examines bargaining behavior in a setting analogous to one in which a manager and a verifier negotiate a fair value for an asset over a range of possible values. In the renewable-contract game, the manager and the verifier are allowed to form a long-term relationship and are offered mutually beneficial payoffs. In the one-period contract game, the negotiation pair has to part after each negotiation and the verifier’s payoff does not rely upon the cooperation from the manager. The results show a 90 percent agreement rate for the renewable-contract game and a 65 percent agreement rate for the one-period contract game. The terms of agreement in the renewable-contract (one-period contract) game favor the manager (verifier), resulting in agreed-upon values overstating (understating) actual asset values. Additional analyses suggest that the fair value context affects bargaining behavior in some unique ways. The results of this study have broad implications for accounting practice.
