The interactive effect of budgetary participation and budget favorability on attitudes toward budgetary decision makers: A research note

Referent cognitions theory predicts that employees who receive unfavorable budgets will have less negative attitudes toward budgetary decision makers if they participated in the budgetary process than if they did not participate. Questionnaire data from international managers were analyzed with regression to test for this predicted interaction between budgetary participation and budgetary outcome favorability. The results indicated that budgetary participation and budget favorability had the predicted interactive effect on the managers' attitudes toward their supervisor and their organization.     

Coping with ambiguity through the budget: the positive effects of budgetary targets on managers' budgeting behaviours

Much consideration has been given over the years to what may be described as the `negative' aspect of budgeting; that budgets may constrain innovation and learning, and that budgetary pressure may lead to unintended behavioural side effects. In contrast to this, the present study examines the extent to which budgets have a more positive, `comforting' role to play in the individual's work experiences. We argue that managers confronted with uncertainties associated with role ambiguity may respond by becoming positively committed to achieving budgetary targets as budgets offer a source of structure and certainty. We find that the use of budgets as an antidote to role ambiguity is a powerful influence on the manager's budgeting behaviour. We test the strength of this effect and we find that budgetary commitment brought on by the experience of role ambiguity may over-ride the potential for recognised explanatory variables such as leadership style, the expectations of the superior, and occupational socialisation, to inform managers' budgeting behaviours in these circumstances. Budgets, it seems, may be as useful to the individual as they are problematic.     

Ritual legitimation, de-coupling and the budgetary process: managing organizational hypocrisies in a multinational company

The study of participation in the budgetary cycle has formed a prominent part of the research literature concerned with the budgetary process. More recently there has emerged a body of literature concerned with exploring the political and symbolic nature of the budgetary process. The paper reports upon the outcomes of an empirical study of the introduction of `budgetary participation' in a division of a European subsidiary of a large North American car manufacturer. We detail the long process of consultation and negotiation within the subsidiary, and between it and the European Headquarters. The study provides a revealing instance of the roles of formal budget participation as a ritual of control and legitimation without the substantive involvement of middle managers and suggested to us the introduction of de-coupling and organizational hypocrisy alongside the introduction of budget participation. The study pays close attention to the contingent effects of the wider political context of the division and the relationships between the division, its organizational context and organizational environment, and how this context played upon the budgetary process in the division. The outcomes that we analyse at `Delta' reflect the de-coupling strategies and organizational hypocrisies commonly found in public sector organizations. In this wider setting the corporation persists with the ritual of `tight' budget negotiation and target setting and apparent underachievement in performance. Yet we conclude that the complex technological and political context to the formation and siting of Delta continued and may continue to support its existence.$g0     

Managing budget emphasis through the explicit design of conditional budgetary slack

Budgetary slack plays an important role in the functioning of budgets in organizations. While theory has found negative as well as positive elements associated with its presence, the empirical literature has interpreted it as being dysfunctional to organizations. In this paper, we present empirical evidence on how a company purposefully budgeted additional financial resources with a motivation intention (Lukka. Budgetary biasing in organizations: Theoretical framework and empirical evidence. Accounting, Organizations and Society 13 (1998) 281–302) to facilitate the managers’ task in achieving the goals of the company. Using quantitative and qualitative data from four logistic sites of a disk drive manufacturer for 24 months, we examine how the company accepted more slack as the demand on business processes increased and goals other than budget targets––in particular, service quality––became harder to achieve. By allowing this practice, headquarters made it clear to local managers that product quality and service were at least as important as meeting budget objectives. We also find that not only was budgetary slack purposefully built during the budgeting process but also in the budgeting system itself through the underlying cost accounting assumptions. The results of this paper provide empirical evidence on the positive aspects of budgetary slack and on the role of cost accounting models used in the budgeting system to facilitate managerial work.     

Leadership style, budgetary participation and managerial behavior

This paper reports the results of a study of the effects of leadership style and budgetary participation on performance and job satisfaction. The first two variables have been given much attention in the organizational behavior and management accounting literatures, respectively, while litte consideration has been given to both jointly. The most important results of the study reveal that the two variables interact in their effects on the criterion variables. Under certain leadership conditions, budgetary participation was found to have strong positive effects on performance and job satisfaction. Under other conditions, the reverse was true. The implications of the results for control system design and personnel management are considered.     

Innovation,endogenous overinvestment,and incentive pay

We analyze how two key managerial tasks interact: that of growing the business through creating new investment opportunities and that of providing accurate information about these opportunities in the corporate budgeting process. We show how this interaction endogenously biases managers toward overinvesting in their own projects. This bias is exacerbated if managers compete for limited resources in an internal capital market, which provides us with a novel theory of the boundaries of the firm. Finally, managers of more risky and less profitable divisions should obtain steeper incentives to facilitate efficient investment decisions.     

Implementing budgetary control in the performing arts: games in the organizational theatre

When administrators or political bodies try to enforce implementation of new management control systems on organizations, various forms of conflicts and games may be observed in the implementation process. Different rationalities are brought face-to-face in the discourse on implementation, and the process will be influenced by some form of political behaviour. A political perspective will call attention to such issues as the players, power and games. By adopting the concept of budget games in an analysis of the actions related to the implementation process we try to show how we can gain a better understanding of the behaviour exhibited by the various groups involved and of the outcome of the process. Observations from a case study of the Royal Danish Theatre show how different budget games emerge in a process in which the Theatre, the Danish Treasury Department, and various actors inside and outside the theatre have been engaged over a period of 15 years, in an attempt to implement a new management control system at the theatre. The management control system being implemented is a combination of a new accounting system and a new planning and budget system. First, we will discuss the strengths of the concept of budget games and the possibilities that it offers for a better understanding of organizational actions related to the implementation of budgeting systems. In addition, we will look at reforms in the public sector with a special view to the role of budgetary control systems. A framework for using budget games as an analytical tool in understanding implementation processes is developed and applied to the case. The analysis shows how various budget games emerge in the organizational field. The budget games start when an individual or a group wants to address an issue and encounters opponents. The analysis also demonstrates how one budget game may create a counter-game. Finally, the findings and their implications are discussed. The analysis demonstrates the usefulness of the budget game perspective in understanding the implementation of accounting systems and the behaviour of the various groups involved or af fected by the system.     

Effects of budgetary participation conflict on job performance of Mexican and US managers

This study extends the stream of participative budgeting literature by introducing a new variable, Budgetary Participation Conflict (BPC). BPC occurs when the level of budget participation experienced by a manager differs from a desired level. We propose a model where BPC is the independent variable to further evaluate the effect of budget participation on job performance. Using path analysis, we measure the direct effect of BPC on job performance, and the indirect effects between BPC and performance that run through job satisfaction and job tenure in two countries, Mexico and the US.While the results do not indicate that BPC either directly or indirectly affects the performance of US managers, the results indicate that BPC negatively affects the job performance of Mexican managers indirectly through the effects of BPC on job satisfaction and job tenure. The relationship between tenure and performance is much stronger among the Mexican managers than among their US counterparts, which is the largest single difference between the Mexican and US results.     

An investigation of ethical position and budgeting systems: Egyptian managers in US and Egyptian firms

The purpose of this paper is to investigate the possible impact of ethical position and national culture on budgetary systems. In particular, the present study examines the budgeting behaviors of Egyptian managers who work for Egyptian firms and Egyptian managers who work for US firms in Egypt. Based on a survey that was administered to 395 participants, our results suggest higher (lower) levels of budgetary participation for Egyptian managers working in US (Egyptian) firms, higher (lower) levels of incentive for Egyptian managers to create slack in US (Egyptian) firms, and more (less) frequent slack-creation behavior among Egyptian managers employed by US (Egyptian) firms. Significant differences were found in the ethical orientations of Egyptian individuals employed by US firms compared with those employed by Egyptian companies. Our results also suggest that ethical orientation helps mitigate slack-creation behavior.     

In which direction is budgeting moving? A report in large firms of Spain

In this paper we provide evidence on the budgetary practice of 135 large firms located in Spain. The results have allowed us to evaluate a wide range of weakness attributed to the traditional budgeting approach, still called into question, as well as to discern towards what emerging paradigm budget is aligned the practice analyzed. Evidence shows that the budgetary approach used by the firms have managed to resolve many of the weakness imputed to the traditional budgeting. At the same time, we note that in the most of the cases studied these procedures are in line with the conceptual ideas defended by the Better Budgeting.     

Environmental turbulence and the functions of budgetary control

While budgetary control is a potentially significant tool when the economic environment is unstable and unpredictable, the analysis of its development demonstrates that its use has dramatically expanded over the time since companies have been able to run forecasts. In order to help them develop budgetary control, companies have implemented strategies that have reduced risks and hence improved their ability to make accurate forecasts. Such strategies have taken many forms and varied from one firm to another. They materialized as various types of agreement, including cartels, through strategies to effect market leadership, or via policies of nationalization. In those companies where the environment was stable and risk limitation was not important, budgetary control could be used for various internal purposes. In this respect, the analysis of the management of companies helps us to identify the purposes for which budgetary control is utilized. It is found that budgetary control allows for greater expansion opportunities and provides the means to strengthen the control of management within major companies. Our observations highlight a contradictory aspect of budgetary control: while it is relevant within an unstable environment, it performs best in an environment which is highly managed.     

Managerial attitude,motivation and the effectiveness of budget participation

This study empirically examined the effect of budget participation on managerial performance using a contingency theory approach. Contingent variables investigated included managerial attitude (towards their job and company) and motivation (to work). The results indicated that both variables moderated the effect of budget participation. Specifically, participation in the budgeting process by managers who reported a more favourable attitude or motivation, was associated with improved performance; whereas participation by managers exhibiting a less favourable attitude or motivation, was associated with hampered performance. These results support the fundamental argument that an organization may be better off following a budgeting style (participative or non-participative) that is congruent with its employee attitude and motivation.     

The effect of cost management knowledge on the relationship between budgetary participation and managerial performance

This study investigates the relationship between budget participation (BP), cost management knowledge and managerial performance. It draws on relevant previous research in the theory of work performance and accounting to formulate the research questions. Eighty-three managers from Finnish companies participated in the study. Data were collected from the managers using a mail questionnaire. The results indicate that managers’ cost management knowledge, and especially the balanced perspective of cost management knowledge, moderates the effect of BP on self-perception of managerial performance. It was specifically found that the effect of BP on perceived managerial performance becomes more positive when managers’ cost management knowledge increases. High perception of managerial performance is obtained when both the BP and managers’ cost management knowledge are high. Our results suggest that organizations should improve the cost management knowledge of managers who participate in the budgeting process.     

How Top‐down and Bottom‐up Budgeting Affect Budget Slack and Performance through Social and Economic Exchange

This paper investigates the effects of a top‐down (TD) versus bottom‐up (BU) orientation in different stages of the budgetary target‐setting process on slack and managerial performance. We use social exchange theory to explain the outcomes of these alternative budgetary arrangements, and complement the traditional focus on budgetary participation in target setting with a process‐oriented perspective. We develop hypotheses predicting that TD and BU orientations in the subsequent stages of the budgeting process have different effects on managers’ exchange relationships with the firm, and their behavioural responses. Using survey evidence from German managers across 127 firms we find that a TD orientation in the issuance of guidelines enhances economic exchange and that a BU orientation in the development of the initial budget proposal enhances social exchange, which in turn are associated with reduced slack and higher performance, respectively.     

Leverage,executive incentives and corporate governance

This paper analyses the effect of executive incentives and internal governance on capital structure. Using a large sample of non‐financial US‐listed firms over the period 1999–2005, it is found that managers have different attitudes towards leverage when offered different incentive schemes; leverage initially decreases in bonuses and stock incentives and then increases in these incentives after a certain incentive level, suggesting the existence of the entrenchment–alignment effects under these incentive schemes. In contrast, leverage initially increases in option incentives and then decreases after a certain option incentive level. When all of these incentive schemes are combined together into a single incentive package, the entrenchment–alignment effects prevail. It is also found that leverage increases in internal governance and managers behave differently under different governance regimes such that the entrenchment–alignment effects prevail under weak governance firms, whereas the alignment–entrenchment effects prevail under strong governance firms. The results also suggest that managers’ target leverage ratio is less than the one predicted by theory or preferred by firm shareholders.     

The impact of nonmonetary performance measures upon budgetary decision making in the public sector

This study addresses the relationship between the provision of nonmonetary performance measures within a budget request document and the reduction in decision makers' reported uncertainty pertaining to past events and the alteration of their subsequent budgetary decisions. An experiment using performance measures developed for an actual crime prevention advertising program and other simulated case material was conducted. The results indicated that in a governmental budgeting setting, knowledge of cues pertaining to program outcomes and societal impacts significantly reduced decision maker uncertainty of past performance and altered their resultant funding decisions. However, subjective biases, created by gender, work experience, education, and personal perceptions of the severity of local crime, were not completely removed from the decision making process.     

The propensity of managers to create budgetary slack: A cross-national re-examination using random sampling

Following a review of the slack literature, Merchant (1985a) proposed that the propensity of subordinate managers to create slack is positively related to the importance placed on meeting budget targets, negatively related to the extent of participation allowed in budgeting processes, negatively related to the degree of predictability in the production processes, and negatively related to their superiors' abilities to detect slack. The results of his empirical tests provided little overall support for these hypotheses. The mixed nature of his results is of some concern since the literature provides considerable support for the theoretical framework underlying his propositions. He concluded that his use of non-random sampling may have influenced the results of his study. The objectives of this paper are first to extend Merchant's (1985a) study using the same measures but employing random sampling in a cross-national setting to enhance result generalizability. Second to assess whether the ability of superiors to detect slack interacts with budgetary participation to affect a subordinate manager's propensity to create slack. The results provide support for the cross-national generalizability of all five hypotheses.     

Political economy of prudent budgetary policy

The principles of tax smoothing and public debt management with stochastic shocks to future national income are extended for prudence. A prudent government deliberately underestimates future national income and the tax base, especially if the variance and persistence of shocks hitting the tax base are large and the tax rate is high. As a precaution the tax rate is thus set higher and public spending lower to build precautionary buffers. This leads to gradual reductions in debt and debt service over time and thus, depending on political preferences, cuts in taxes or increases in public spending. Prudence offsets the intertemporal spending, tax and debt biases resulting from common-pool distortions. Appointing a strong finance minister with as many voting rights as the spending ministers combined ensures that the intratemporal common-pool distortions of an excessively large public sector are eliminated. A strong and prudent minister of finance can thus offset the impatient profligacy of squabbling spending ministers. However, if voters care about outcomes on election eve, finance ministers are tempted to build excessive precautionary buffers early on to dish out tax cuts and boost spending on election eve. Too much prudence may thus be abused for short-run electoral gains.     

Reliance on budgetary control, manufacturing process automation and production subunit performance: A research note

The degree to which reliance can be placed on budgetary control in the assessment of production subunit performance, particularly with the advent of manufacturing process automation involving, for example, robots and CAD/CAM, is problematic. While budget-based control systems are extensively employed in organizations, such usage does not provide clear evidence of their utility as performance enhancement vehicles as advances are made in the automation of manufacturing processes. The purpose of this paper is to report the results of a study which examines the effect of automation on the link between reliance on budgetary control and production subunit performance. The findings suggest that manufacturing process automation moderates the relation between reliance on budgetary control and departmental performance. As such, firms may benefit from a reliance on budgetary control in the evaluation of production subunit performance as manufacturing processes become more automated.     

The moderating effects of hierarchy and control systems on the relationship between budgetary participation and performance

This study investigates the moderating effects that an organizational unit's hierarchical level and control systems have on the relationship between budgetary participation and performance. Using moderated regression analyses, we find a three-way interactive effect on performance between hierarchical levels, types of control systems, and budgetary participation. Further analyses reveal that at the high level of a hierarchy, budgetary participation has a positive relationship with performance and this relationship is stronger for organizational units that use output control than for those that use behavior control. By contrast, at the low level of a hierarchy, budgetary participation has a negative relationship with performance and this relationship is stronger for organizational units that use output control than for those that use behavior control.