- Ibeanusi Sylvanus Chigozie
- DOI: 10.5281/zenodo.20511350
- GAS Journal of Economics and Business Management (GASJEBM)
This term paper examines the stochastic dynamics of inflationary shocks on inter-company transfer pricing decisions and their consequent effects on the profitability of quoted consumer goods firms in Nigeria over the period 1998–2025. Using secondary data sourced from the Nigerian Exchange Group (NGX), the Central Bank of Nigeria (CBN) Statistical Bulletin, the National Bureau of Statistics (NBS), annual reports of quoted consumer goods companies, and the Federal Inland Revenue Service (FIRS) guidelines, the study adopts a Geometric Brownian Motion (GBM) framework augmented by a Jump-Diffusion model (Merton, 1976) to capture both the continuous drift and discrete shock components of Nigeria’s inflationary environment. The Consumer Price Index (CPI), the Producer Price Index (PPI), inter-company transfer pricing ratios, and profitability metrics, comprising Return on Assets (ROA), Return on Equity (ROE), and Net Profit Margin (NPM), are modelled through a system of stochastic differential equations calibrated to Nigerian macro-financial data. Panel data regression with firm-fixed and time-fixed effects, augmented by Generalized Method of Moments (GMM) estimation for dynamic endogeneity control, is employed across twenty-three (23) quoted consumer goods firms on the NGX. Empirical results reveal that inflationary shocks exert a statistically significant negative effect on profitability when transfer prices are inelastically managed but that firms with adaptive cost-plus transfer pricing mechanisms exhibit profitability resilience of 34–61 percent above sector median during high-inflation episodes. The stochastic volatility of inflation (σ = 0.41) substantially exceeds the transfer-price adjustment speed (λ = 0.17), creating a persistent profitability gap. Policy implications for regulatory frameworks governing Related-Party Transactions (RPTs) under the Nigerian Transfer Pricing Regulations (2018, amended 2021) are discussed, alongside recommendations for inflation-indexed transfer price corridors.
