The Effect of Budget Emphasis and Information Asymmetry on the Relation between

Budgetary Participation and Slack

Author(s): Alan S. Dunk
Source: The Accounting Review, Vol. 68, No. 2 (Apr., 1993), pp. 400-410
Published by: American Accounting Association
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THE ACCOUNTING REVIEW
Vol. 68, No. 2
April 1993
pp. 400-410

The Effect of Budget Emphasis and

Information Asymmetry on the
Relation Between Budgetary
Participation and Slack
Alan S. Dunk
University of Western Sydney, Nepean

SYNOPSIS AND INTRODUCTION:A majorconcern in the literatureis

that participationby subordinatesmay resultin the generationof slack bud-
gets (Antle and Eppen 1985). In one of the earliest studies, Williamson
(1964) concluded that subordinate managers will try to influence the
budget-setting process and obtain slack budgets. In conformance with
Merchant (1985a), Lukka(1988), and Young (1985), budgetary slack is
defined as the express incorporationof budget amounts that make it easier
to attain. Managers may build slack into budgets by strategies that
understaterevenues and overstate costs (Schiff and Lewin 1970).
Whether budgetaryslack is a likelyoutcome in all participativelyset
budgets is a matterof conjecture. Lukka(1988) argued that a high degree
of participationgives subordinatemanagersthe opportunityto contribute
directlyto the creationof slack, and vice versa. However,the linkbetween
participationand slack is equivocal, since Cammann (1976), Merchant
(1985a), and Onsi (1973) provideevidence that participationmay lead to a
reductionin slack, which can be attributedto the positive communication
between managersso that subordinatesfeel less pressureto create slack.
The literatureproposes a link between participationand budgetary
slack throughtwo variables:superiors'budget emphasis in their evaluation
of subordinateperformance,and the degree of informationasymmetrybe-
tween superiorsand subordinates.When participation,budget emphasis,
and informationasymmetryare high (low), slack will be high (low).

Thanks are due to George Cooney, Graeme Harrison, Ken Merchant, Ken Moores, David Otley, and to par-
ticipants at workshops at the Flinders University of South Australia and the University of Western Sydney,
Nepean, for their comments on previous drafts of this project. The helpful comments of the anonymous
referees are also gratefully acknowledged. Special thanks are reserved for Peter Brownell, whose contribution
and support was invaluable.

Submitted March 1991.

Accepted December 1992.

400

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Dunk-The Effect of Budget Emphasis and InformationAsymmetry 401

For this study, samples of managers were drawn from manufacturing

organizations in the Sydney, Australia, metropolitan area. Measures of
budgetary slack and information asymmetry were developed. Support was
found for low (high) slack when the predictors are high (low).
Key Words: Budgetary slack, Information asymmetry, Budgetary partici-
pation, Budget emphasis.
Data Availability: The data are available from the author.

rT HE remainder of the article is organized as follows. In the following section, the

literature is reviewed and the theory is developed. The next section details the
method, and is followed by a presentation of the results. Finally, the conclusions,
implications, and limitations of the study are discussed.

I. Previous Literature and Theoretical Development

The Relation Between Participation and Budgetary Slack

Magee (1980) proposed that the expected payoff to principals (superiors) could be
enhanced with access to local information held by agents (subordinates) prior to setting
the budget. Local information is an example of information asymmetry (Baiman and
Evans 1983; Coughlan and Schmidt 1985; Penno 1984), which arises when the subor-
dinate has information relevant to the decision process associated with budgeting (Kren
and Liao 1988). Information asymmetry exists only when subordinates' information
exceeds that of their superiors.
Subordinates' participation in the budget-setting process gives principals the
opportunity to gain access to local information (Baiman 1982; Baiman and Evans 1983;
Magee 1980) which allows subordinates to communicate or reveal some of their private
information that may be incorporated into the standards or budgets against which their
performance would be assessed (Baiman and Evans 1983). But agents may misrepre-
sent or withhold some of their private information, which could lead to budgets with
slack (Christensen 1982; Merchant 1985b; Pope 1984; Young 1985). Hence, while
participation of subordinates may give superiors access to private information,
information asymmetry may enable slack to be increased in participatively set budgets.
Budget Emphasis. The primary argument for agents' efforts to build slack in their
budgets is to enhance their compensation prospects. If subordinates perceive their
rewards as dependent on budget attainment, they may try to build slack into their
budgets through the participation process (see, e.g., Lowe and Shaw 1968; Schiff and
Lewin 1968, 1970; Waller 1988). Thus, budget emphasis in performance evaluation
induces the creation of budgetary slack (Baiman and Lewis 1989).
The Interaction of Information Asymmetry, Budget Emphasis, and Participation. If
budget emphasis and information asymmetry are high, subordinates are likely to
attempt to negotiate slack budgets (see, e.g., Baiman and Lewis 1989; Christensen 1982).
If information asymmetry is low and budget emphasis is high, subordinates will have
the incentive to create slack, but will not be in a position to obtain it (Chow et al. 1988;
Penno 1984; Waller 1988). In all cases, participation in the budget-setting process will
need to be high for the subordinate to have the opportunity to build in slack (Lukka

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402 TheAccountingReview,April1993

1988). When participation is low, the prospects for subordinates' building slack into
their budgets are restricted, irrespective of the level of budget emphasis and informa-
tion asymmetry. Thus, the literature suggests that high (low) participation with high
(low) information asymmetry and high (low) budget emphasis is likely to give rise to
high (low) budgetary slack. The hypothesis in its null form is stated as follows:
H.: There is no interaction between budgetary participation, information asym-
metry, and budget emphasis that affects budgetary slack.

II. Method
To test this hypothesis, measures of budget emphasis and budgetary participation
were drawn from the literature, but measures of budgetary slack and information
asymmetry required development.
Sample Selection
Companies selected for inclusion in the study were drawn randomly from the
population of manufacturing organizations with more than 100 employees located in
the Sydney, Australia, metropolitan area using the KompassAustralia,(1988)register of
firms. It was expected that companies with fewer employees were unlikely to have
clearly defined areas of responsibilityfor managers.A total of 61 firms were selected for
inclusion in the sample. No restriction was placed on the areas of responsibility from
which managers could be drawn for sampling purposes.'
Each firm was contacted by telephone, and 118 managers were personally
requested to contribute to the study. A questionnaire with a cover letter and reply-paid
self-addressed envelope was mailed to each manager, and a telephone follow-up was
made to promote a higher response rate. This follow-up also verified that the targeted
managers had responded to the questionnaire themselves. Responses were received
from 79 managers, an overall response rate of 67 percent. The respondents' mean age
was 42 years, their average length of experience was 13 years, they had held their
current positions on average for 4.5 years, and the mean number of employees in their
areas of responsibility was 102.
Variable Measurement
An Analysis of the Draft Measure of Budgetary Slack. The draft six-item measure of
budgetaryslack is reported in appendix A. The items in the instrument are based on the
definition of budgetary slack employed in this study. As such, they focus on the ease
with which budgetary targets can be achieved. The items are anchored by (1) strongly
disagree and (7) strongly agree.2
A factor analysis of the draft measure indicated that items 1 and 3 did not load on
the factor at the 0.5 level, which was the criterionfor item inclusion;therefore,both items

' The findings of experimental research suggest that subjects' risk preferences affect the creation of slack
(see, e.g., Chow et al. 1988; Waller 1988; Young 1985). While Waller (1988) controlled risk preferences
experimentally, this study relies upon random sampling to control for the possible confounding effects of risk
preferences on the results (Dominowski 1980; Monette et al. 1986).
2 The study relies upon managers' perceptions of the level of slack in their budgets. Although more
objective data on slack levels might be desirable, the means for generating this type of data are difficult to
ascertain.

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 Asymmetry
Dunk-TheEffectof BudgetEmphasisandInformation 403

were subject to exclusion from the instrument. Since item 3 had a much lower loading
than item 1, the decision was made to remove only item 3 first, and to then evaluate the
findings of a further factor analysis based on the remaining five items. In this analysis,
all five items loaded on a single factor. Because item 1 again did not load on the factor
at the 0.5 level, it was excluded from the instrument. A factor analysis of the remaining
four items (2, 4, 5, and 6) indicated that they loaded above 0.5 on a single factor, which
had an eigenvalue of 1.3878 and explained 34.7 percent of the variation in the
underlying variable. In addition, the Kaiser-Meyer-Olkin(KMO)measure of sampling
adequacy was 0.5827.3
Based on these findings, a measure of budgetaryslack was construced from items 2,
4, 5, and 6. Although the correlation between this four-item measure and the originally
proposed six-item measure is 0.932 (p < 0.001), and the Cronbach alpha is virtually
identical to that of the originally proposed measure (0.6813), the findings enabled a
more sharply focused measure.' Descriptive statistics for the instrument are in table 1.
An Analysis of the Measure of InformationAsymmetry. Since there is no measure
of information asymmetry designed for use in field studies, one was developed and is
reported in appendix B. The six items in the instrument are based on the definition of
information asymmetry as well as on suggestions in the literature(see, e.g., Chow 1983;
Chow et al. 1988; Waller and Chow 1985). The items reflect such a perspective, and the
anchors were arranged on the seven-point Likert scale so that a response of (1) to any
item would indicate that the superior had more information, whereas a response of (7)
would indicate that the subordinate had more information than the superior. A subor-
dinate manager had to score more than 24 on the scale for there to be any information
asymmetry. A score of 24 indicates zero information asymmetry, according to the
definition in this study.
Respondents' scores for information asymmetry ranged from 18 to 42. Seven
managers whose scores were less than 24 were excluded from the analysis since the
information differential was in favor of their superiors (i.e., there was no information
asymmetry). However, the finding that only seven managers (9 percent) thought the
information differential favored their superiors is consistent with the claim that
subordinates typically possess local information not known to the superior (see, e.g.,
Baiman and Evans 1983; Chow et al. 1988).
The Cronbach alpha for the six-item instrument is 0.79. A factor analysis revealed
that the items loaded on a single factor, which had an eigenvalue of 2.4086 and
explained 40.1 percent of the variation in the underlying variable. The KMOmeasure of
sampling adequacy was 0.7648. Table 1 presents descriptive statistics for this measure.
Budget Emphasis. Hopwood's (1972) eight-item measure of superiors' evaluation
style was used to assess budget emphasis. Hopwood determined the styles of evaluation
by the presence or absence of the items "meeting the budget" and "concern with costs"
among the top three criteria of respondents. As a result of Brownell's (1982)observation
that many of his respondents failed to complete the ranking properly, a seven-point

3 The KMO measure assesses the extent to which the items are psychometrically related, as determined by
their intercorrelations. The boundaries for the KMO are minus infinity and plus 1 (Kaiser 1970). Provided the
measure of sampling adequacy is greater than 0.5, a correlation matrix is acceptable for factor-analytic
examination (Kaiser and Rice 1974).
4 Respondent interviews with eight production and six marketing managers provided anecdotal support

for the findings of the psychometric analysis of the measure of budgetary slack.

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404 The Accounting Review, April 1993

Table 1
Descriptive Statistics: Independent and Dependent Variables

Actual Theoretical Cronbach

Variable Mean S.D. Range Range Alpha

Budgetary slack 13.528 4.806 4-25 4-28 0.6833

Budgetary participation 31.361 7.393 6-42 6-42 0.8892
Information asymmetry 31.972 5.096 24-42 24-42 0.7923
Budget emphasis 5.778 1.153 2-7 1-7 n.a.

Bivariate Correlations:
Participation InformationAsymmetry

Information asymmetry 0.110

Budget emphasis 0.147 0.061

Likertscale was used in this study for each of the eight criteria in the measure. The item
''meeting the budget" alone was considered an indicator of budget emphasis.
Descriptive statistics for the measure are presented in table 1.
Budgetary Participation. Subordinates' degree of participation was assessed by
using the Milani (1975) six-item measure.5 In this study, the Cronbach alpha is 0.88,
which further attests to the reliability of the measure. A factor analysis revealed that all
the items loaded on a single factor, which had an eigenvalue of 3.5362 and explained
58.9 percent of the variation in the underlying variable. The KMOmeasure of sampling
adequacy was 0.8758. Descriptive statistics for the instrument are presented in table 1.
A Further Analysis of the Measures of Budgetary Slack and Information Asymmetry.
To obtain further evidence of the reliability of the instruments measuring budgetary
slack and information asymmetry, new questionnaires were sent to an entirely new
sample of managers subsequent to hypothesis testing. Use of the same sampling criteria
enabled an assessment of the stability of the measures across samples and time periods;
reliability coefficients consistent with those previously obtained would show the
stability of these instruments (Nunnally 1981, 191; Rosenthal and Rosnow 1991, 46).
A total of 49 additional questionnaires were mailed, of which 40 were returned.The
mean age of the respondents was 43, they had held their present positions an average of
four years, their mean experience in the areas they managed was 12 years, and the
average number of employees in their areas of responsibility was 78. Except for the
smaller number of employees managed, the descriptive statistics are similar to those for
the primary sample. The reliability results also were consistent with results obtained
from the primary sample. The Cronbach alphas are 0.88 for information asymmetry
and 0.69 for the revised measure of budgetary slack. Since this further analysis focused
only on the measures of budgetary slack and information asymmetry, the 40 responses
could not be added to the primary sample.

5Evidence of the validity of the instrument has been obtained by correlating it with the Hofstede (1968)
single-choice measure, for which Brownell (1983) reported a correlation of 0.74 (p < 0.01). Brownell (1983)
reported a Cronbach alpha of 0.86.

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Dunk-The Effect of Budget Emphasis and InformationAsymmetry 405

Table 2
Results of the Hypothesis Test

Variable Coefficient Value S.D. t-statistics p-values

Intercept bo 170.400 85.350 2.00 0.050
Participation bi -4.869 2.723 -1.79 0.078
Informationasymmetry b2 -5.018 2.590 -1.94 0.057
Budgetemphasis b3 -28.010 14.600 -1.92 0.059
Participationx
information asymmetry b4 0.163 0.082 1.98 0.052
Participationx
budget emphasis b5 0.862 0.459 1.88 0.065
Information asymmetryx
budget emphasis b6 0.933 0.444 2.10 0.040
Participationx information
asymmetryx budget emphasis b7 -0.029 0.013 -2.16 0.035
Note: R2=0.30; n = 72; F7a64=3.90;p = 0.001.

III. Results
The following model was used to test the hypothesis:
Y= bo+ bX, + b2X2+ b3X3+ b4X1X2+ b5XiX3+ b6X2X3+ b7XX2X3+ e, (1)
where:
Y=budgetary slack,
X,=budgetary participation,
X2=information asymmetry, and
X3=budget emphasis.
Since it was hypothesized that the three independent variables would interact to
affect budgetary slack, it was expected that the coefficient of the three-way interaction
term, b7, would be statistically significant. The results, presented in table 2, indicate
that b7 is significant at p=0.035 and that the model as a whole explains 30 percent of
the variation in budgetary slack (p = 0.001). The exclusion of seven managers from the
analysis whose information asymmetry scores were below 24 made no difference in the
results; b7 remained significant, t = -2.32, p = 0.023.6 No attempt was made to interpret
the results of significance tests for the main effects and the two-way interaction terms
since the variables are not measured on ratio scales (Southwood 1978).7
As b7 in table 2 is significant and negative, it appears that slack is low when

6 Factor scores were also extracted with the Bartlett, regression, and Anderson-Rubin methods as
provided
by SPSSX. The findings from a series of regression analyses based on the derived sets of factor scores were
consistent with those using raw scores, as reported in table 2.
7
Southwood (1978) demonstrated that the coefficients of main effects and lower-order interaction terms
together with their t-statistics are arbitrary if ratio scales are not employed. He illustrated that by changing the
origins of the measures of the predictors, their partial regression coefficients can be made to equal zero, since
no meaningful origin can be given to non ratio-scaled data.

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406 The Accounting Review, April 1993

Table 3
Three-Way Interaction: Table of Mean Scores for Budgetary Slack

Low Participation High Participation

Low budget emphasis

Low information: 16.7 (6.370) 13.1 (4.670)
asymmetry (n = 7) (n = 7)
High information 15.8 (4.981) 16.6 (2.510)
asymmetry (n = 7) (n = 5)
High budget emphasis:
Low information 12.0 (3.081) 12.9 (3.885)
asymmetry (n = 11) (n = 11)
High information 15.0 (5.268) 10.1 (4.357)
asymmetry (n = 9) (n = 15)

Note: The standard deviation is given in parentheses after the mean score.

participation, information asymmetry, and budget emphasis are all high. This finding
runs contrary to the expectation developed from the literature. To investigate this
finding, a three-way table of slack scores based on participation, information
asymmetry, and budget emphasis dichotomized at their means was constructed. Table
3, which shows the mean, standard deviation, and sample size for budgetary slack in
each category, indicates that slack is lowest when all the independent variables are
high, and highest when all the predictors are low.
The information in table 3 was used to graph the three-way interaction shown in
figure 1. The two graphs illustrate that slack is lowest when information asymmetry,
participation, and budget emphasis are all high, and that slack is highest when the
predictors are all low. The graphs also illustrate that slack is higher when budget
emphasis is low rather than high.

IV. Conclusions
The results of this study show that the relation between participation and slack is
contingent upon budget emphasis and information asymmetry, but in a direction
contrary to expectations. The results provide evidence for the utility of participative
budgeting, and little support for the view that high participation may result in increased
slack when the other two predictors are high. Although participation may induce
subordinates to incorporate slack in budgets, the results suggest that participation
alone may not be sufficient. The findings suggest that slack reduction results from
participation, except when budget emphasis is low.
The results of the study may be subject to a number of possible limitations.
Measures of two constructs had to be developed, and their validation has not been
independently established. Also, construction of the measures of budgetary slack and
information asymmetry from the literature reviews, item analyses, and factor analyses
may have driven the results. In addition, it could be argued that the findings obtained in
this research are partly attributable to a poor measure of the dependent variable

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Dunk-The Effect of Budget Emphasis and InformationAsymmetry 407

Figure 1
Three-Way Interaction Graphs

Panel A. Low InformationAsymmetry: Panel B. High InformationAsymmetry:

Slack Slack

18 - 18 - low budget
low budget emp _
16 - emphasis 16 --

14 -14 - high
budget
12 - highbudget 1212- emphasis
emphasis
10 - 10 -

Low High Low High

Participation Participation

(budgetaryslack). As a construct, slack may be seen in both a clinical and an emotive

sense. Although the interest here is in the former concept, managers' questionnaire
responses may have been founded on an emotive platform and the results could be
prejudiced.
Another limitation of the study is that data were drawn only from firms located in
the Sydney metropolitan area; hence, the results are potentially only generalizable to
that population. It may also be the case that cross-sectional survey methods are not
sufficient for the investigation of budgetary slack, given the nature of the construct.
Case studies may assist in providing additional information on the circumstances in
which slack may occur.

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408 The Accounting Review, April 1993

Appendix A
Budgetary Slack Measure

The following statements relate to the budgetaryenvironment in which you work. Please indicate the extent
of your agreement with each statement by circling a number from 1 to 7, based on the following scale:
1. Strongly disagree 5. Mildly agree
2. Moderately disagree 6. Moderatelyagree
3. Mildly disagree 7. Strongly agree
4. Neutral
1. Standards set in the budget induce high 1 2 3 4 5 6 7
productivity in my area of responsibility.*
2. Budgets set for my area of responsibility 1 2 3 4 5 6 7
are safely attainable.
3. I have to carefully monitor costs in my 1 2 3 4 5 6 7
area of responsibility because of budgetary
constraints.*
4. Budgets for my area of responsibility are 1 2 3 4 5 6 7
not particularlydemanding.
5. Budgetarytargets have not caused me to be 1 2 3 4 5 6 7
particularlyconcerned with improving
efficiency in my area of responsibility.
6. Targets incorporated in the budget are 1 2 3 4 5 6 7
difficult to reach.*
*Responses to these items were reverse-scored.

Appendix B
Information Asymmetry Measure

Please respond to each of the following questions by circling a numberfrom 1 to 7, based on their individual
scales:
1. In comparison with your superior, who is in possession of better information regarding the activities
undertaken in your area of responsibility?
1 2 3 4 5 6 7
My superior has We have about I have
much better the same quality much better
information of information information
2. In comparison with your superior, who is more familiar with the input-outputrelationships inherent in
the internal operations of your area of responsibility?
1 2 3 4 5 6 7
My superior is We are about I am
much more equally much more
familiar familiar familiar
3. In comparison with your superior, who is more certain of the performance potential of your area of
responsibility?
1 2 3 4 5 6 7
My superior is We are about I am
much more equally much more
certain certain certain
Continued

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Dunk-The Effect of Budget Emphasis and InformationAsymmetry 409

Appendix B-Continued

4. In comparison with your superior, who is more familiar technically with the work of your area of
responsibility?
1 2 3 4 5 6 7
My superior is We are about I am
much more equally much more
familiar familiar familiar
5. In comparison with your superior, who is better able to assess the potential impact on your activities of
factors external to your area of responsibility?
1 2 3 4 5 6 7
My superior is We are about I am much
much better able equally able better able
6. In comparison with your superior, who has a better understandingof what can be achieved in your area
of responsibility?
1 2 3 4 5 6 7
My superior has We have about I have a
a much better the same much better
understanding understanding understanding

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