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Budgetary Participation and Managerial Performance: The Impact of Information and

Environmental Volatility
Author(s): Leslie Kren
Source: The Accounting Review, Vol. 67, No. 3 (Jul., 1992), pp. 511-526
Published by: American Accounting Association
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Accounting Review.
Vol. 67, No. 3
July 1992
pp. 511-526

Budgetary Participation and

Managerial Performance:
The Impact of Information
and Environmental
Leslie Kren
University of Wisconsin-Milwaukee

SYNOPSIS AND INTRODUCTION:Organizational theorists have posited

a positive relationshipbetween employee performanceand participationin
budgeting or goal setting (Argyris1952; Beckerand Green1962). In exam-
ining this proposition,empiricalresearchhas studied the motivationaland
cognitive mechanisms by which participationmay be relatedto employee
performance(Locke et al. 1986; Murray1990). Cognitivemechanisms in-
clude factors such as the acquisitionand use of informationand compre-
hension of job requirements(Locke et al. 1986).
Kren and Liao (1988) argue that empiricalaccounting research has
generallyfocused on the motivationaleffects of participation.In general,
results have been mixed (Murray1990). While Merchant(1981) found a
positive relationshipbetween motivationand participation,Brownelland
McInnes (1986) did not find such a relationship.The results prompted
Brownelland McInnesto suggest that future researchshould examine per-
formance benefits of participationthat are not mediated by motivation.
Recently, accounting researchershave studied the role of cognitive
factors in explainingthe relationshipof participationto performance.Chen-
hall and Brownell(1988), for example, found that budgetaryparticipation
provided informationthat reduced role ambiguitythat contributedto im-
proved performance, and Mia (1989) found the relationship between
participationand performanceto be moderatedby job difficulty.
The objective of this article is to examine the perceived level of job-
relevantinformationas an interveningvariablebetween budgetarypartic-
ipationand individualperformance.Job-relevantinformation(JRI)is infor-
mation that facilitates job-related decision making. The results of this
The author gratefully acknowledges helpful comments by Frank Collins, Chester A. Schriesheim, Jeffrey L.
Kerr, David McLain, Mark A. Mone, and the referees on earlier drafts of this article.

Submitted July 1990.

Accepted January 1992.
512 The Accounting Review, July 1992

study, based on a questionnaire survey of division managers in large

corporations, suggest that participation affects performance, not directly,
but through JRI. In addition, this positive performance effect of participa-
tion persists and is more pronounced when environmental volatility is high,
although the results do not provide unambiguous evidence.
Key Words: Participation, Budgeting, Environmental volatility, Cognitive
Data Availability: Data are available from the author upon request.

T HE remainder of this article is organized as follows. The next section discusses

the role of JRI as an intervening variable between budgetary participation and
individual performance. The effects of environmental volatility are also dis-
cussed. Subsequent sections contain a description of the research method, an analysis
of the results, and a summary and conclusion.

I. Job-Relevant Information as an Intervening Variable

The accounting literature (Baiman 1982; Baiman and Demski 1980; Tiessen and
Waterhouse 1983) has identified two primary types of information in organizations:
decision influencing, which is collected about a manager'sbehavior for the purposes of
performance evaluation; and JRI,which helps a manager to improve his or her action
choice through better-informedeffort. The latter provides the manager with a better un-
derstanding of decision alternatives and actions needed to reach objectives (Lockeet al.
1986). JRIhas also been called decision-facilitating (Demski and Feltham 1976) and ex
ante information (Baiman 1982; Tiessen and Waterhouse 1983). Most accounting
information in the organization is of one or the other type.
In most budgetary situations, environmental factors, managerial skills, and
effort jointly determine performance (Chalos and Haka 1990). JRI can improve
performance because it allows more accurate predictions of environmental states and
thus allows more effective selection of appropriate courses of action. Campbell and
Gingrich (1986) provided evidence supporting the positive performance effects of JRI.
In their experiment, some programmersactively participated in discussing new project
assignments with their superiors and jointly determined their completion targets.
Objectives of equal difficulty were assigned to other programmers. The participating
programmers significantly outperformed the other programmers for complex but not
for simple projects. Campbell and Gingrich concluded that participation in setting
goals led to task discussions with another expert (the superior)that allowed program-
mers to gain specific insights into more effective approaches to complex projects.
When projects were simple, however, effective task procedures may have been so
obvious such that discussions with superiors provided few insights and had little effect
on performance.
Budgetaryparticipation can similarly facilitate the acquisition and use of JRI.Since
participation provides an opportunity to influence the budget before it is finalized, in
preparing a participatorybudget, a manager must generally assume a more active role.
Thus, the manager becomes more involved in considering and evaluating alternative
budget goals. Participation may thus increase the manager's attempts to formulate ac-
Kren-Budgetary Participationand ManagerialPerformance 513

Figure 1
The Research Model


p21=0.397 - P32 0.452

PARTICIPATION (Z.) ------------------- -0 PERFORMANCE (Z3)

P31 = 0.034

Note: The subscripts 1, 2, and 3 refer to the variables of participation, JRI, and performance, respectively.
The path coefficients (pj) indicate the effect of variable j in explaining the variation in variable i.

curate forecasts of environmental states and can focus the manager's attention on deci-
sions and behaviors needed in future periods. It may also increase the time spent
thinking about budgetary objectives and alternative means-end approaches (Earley
et al. 1987; Lawrence and Lorsch 1967; Locke et al. 1986). As a consequence, budgetary
participation can create an environment that encourages the acquisition and use of JRI.
Results of field research provide supporting evidence (Lowe and Shaw 1968; Simons
1987) as does the research on budget-related behaviors (Merchant 1984). Simons' (1987)
field study of the Johnson & Johnson Company provides detailed descriptions of how
budgetary participation promotes extensive JRI search activities by managers, and
these activities appear to occur primarily because the budgetary process is participa-
tory rather than imposed.
Several sources of JRIare available to the manager, including the external environ-
ment (i.e., environmental scanning [see Bourgeois 1985])and peers, subordinates, and
superiors (Hopwood 1976). Earlier research suggests that a manager's superior is an
effective information source in most organizations, particularly when superiors have
extensive company-specific experience, as in the case of companies that routinely
promote from within (Simons 1987).
Two recent studies have examined the effects of cognitive factors associated with
JRI.Mia (1989)proposed that perceptions of job difficulty moderatethe relationship be-
tween budgetary participation and performance because participation provides valu-
able information for difficult jobs. Surveying middle-level managers, Mia found a
positive relationship between participation and performance only when job difficulty
was high.
Chenhall and Brownell (1988) have suggested that role ambiguity links budgetary
participation and performance. In a survey study, they found that participation re-
duced role ambiguity, which improved performance. JRIand role ambiguity are similar
constructs in that the latter reflects the extent to which managers understand their
duties and responsibilities, while the former is a measure of the information available
to managers to accomplish job-relatedtasks.
The schematic structure in figure 1 suggests that participationhas an indirect effect
on performance through JRI. Participation is expected to increase JRIinitially, which
514 The Accounting Review, July 1992

would in turn improve performance. Thus, JRIserves as the link between participation
and individual performance, suggesting the following hypothesis:
Hi: The relationship between budgetary participation and managerial perfor-
mance will be explained by an indirect effect whereby participation increases
job-relevantinformation, and job-relevantinformation is positively associated
with performance.

The Effects of Environmental Volatility

In describing the organization's external environment, organizational theorists
(Downey and Slocum 1975; Duncan 1972; Tosi et al. 1973) have generally included two
components: (1) diversity, the range of environmental factors faced by an organization
and (2) volatility, the change or variability among these factors. Leblebici and Salancik
(1981) argued that diversity is more predictable because it can be evaluated and antici-
pated. Thus, it can be managed using institutionally formalized procedures (i.e., by
"disentangling the pieces," as in market segmentation [p. 583]). Volatility, however, is
stochastic in nature and cannot be easily anticipated; managers make inferences about
effects of probabilistic environmental factors on cause and effect relationships. JRIcan
be used to improve such predictions. Thus, one would expect that volatility would
affect the information-gathering activities of managers (Bourgeois 1985; Hopwood
1976). Leblebici and Salancik (1981), for example, found that bank loan officers sought
more information when making loan decisions when the environment is volatile.
In a budgeting setting, volatility is expected to positively affect: (1) the level of
budgetary participation, (2) the link between participation and JRI, and (3) the link
between JRIand performance. When volatility is low, few exceptions occur and rules
and procedures are adequate to specify behaviors. Managers can also rely more readily
on insights gained from previous experience. As volatility increases, however,
numerous exceptions can overwhelm the information system unless decisions are
made at lower hierarchical levels in the organization (Galbraith1973; Simons 1987).
Consequently, greater participation in decision making by lower-level managers is
required. Govindarajan(1986) and Hopwood (1976) extended this reasoning about par-
ticipation in decision making in general to participation in budgeting, suggesting that
greater budgetary participation should be found in organizations facing greater
In addition, the link between participation and JRIis expected to become stronger
when volatility is high because managers are expected to take greater advantage of par-
ticipation to acquire JRI for effective decision making (Tung 1979). The link between
JRI and performance is also expected to become stronger when volatility is high
because volatile environments require managers to make maximum use of all available
information to deal with more difficult decision settings (Leblebici and Salancik 1981;
Tung 1979). When volatility is low, in contrast, more decisions are routine and some JRI
may not be needed to carry out job functions because rules and procedures may be
adequate for effective job performance, which is the second hypothesis:
H2: When volatility is high, three effects on the model proposed in hypothesis Hi
(fig. 1) will result:
H2a: the level of participation will increase,
Kren-Budgetary Participation and Managerial Performance 515

H2b: the link between participation and JRIwill be stronger, and

H2c: the link between JRIand performance will be stronger.

II. Research Method

Data for this study were collected by using a questionnaire survey of profit center
managers from Fortune500 manufacturing firms. The listing for each Fortune500 firm
in the Dun and Bradstreet Reference Book of CorporateManagementswas examined,
and executive-level profit center managers at the hierarchical level immediately below
the CEO were identified. A sample of profit center managers was contacted to ensure
that they have budgetary responsibility.
A maximum of two managers in a firm were randomly selected for inclusion in the
sample to allow for more company representation. Companies listed in the directory
were excluded if profit center managers could not be clearly identified from their job
titles. This selection process yielded 192 managers from 96 companies. A cover letter
and a questionnaire were mailed to each manager. A follow-up letter and another copy
of the questionnaire were sent after approximately three weeks. After several addi-
tional weeks, all remaining nonrespondents were contacted by telephone.
Follow-ups of the original 192 managers revealed that 38 had retired, left the
company, or had changed to new positions. Of the remaining 154 potential respon-
dents, 80 usable responses were received (a response rate of 51.9 percent) from 63
different companies. Responses were obtained from two managers in each of 17
companies. Respondents were promised anonymity, but organizational affiliation was
tracked to allow measurement of environmental volatility. Respondents' average tenure
in their positions was 4.8 years (s.d. = 3.3). Appendix A provides a listing by industry (as
defined by four-digit SIC code) of the final sample.
Appendix B contains an abbreviated copy of the research questionnaire used to
measure the self-reported variables in this study.
Performance. Because of the promise of respondent anonymity, a self-rated
measure of performance was used. Managers were asked to rate themselves on eight
dimensions of performance identified by Mahoney et al. (1965):planning, investigating,
coordinating, evaluating, supervising, staffing, negotiating, and representing. An
overall item was also included (item 9).
The Mahoney et al. measure has been used effectively in previous studies of budget-
ary participation (e.g., Brownell and McInnes 1986; Govindarajan1986). Although the
potential for bias (higher mean values in comparison with objective performance
measures) exists with a self-rating of performance, it may not be consequential since
there is no reason to suspect a systematic relationship with the independent variables.
According to Brownell and McInnes (1986),this performance measure should meet
two criteria:(1) reasonable assessment of independent dimensions of performance, and
(2) the majority of the variation in the overall rating (item 9) should be explained by the
eight items. Regressing the overall rating as the dependent variable on the ratings of
each of the eight individual dimensions resulted in 75.6 percent explained variation,
suggesting that the second criterion was met. To meet the first criterion of indepen-
516 The Accounting Review, July 1992

dence, Brownell and McInnes assert that pair-wise correlationsbetween the eight vari-
ables should be less than the correlation of each variable with the overall rating. Only
four of the 28 comparisons violated this criterion. Thus, the measure appears to encom-
pass reasonably independent dimensions of performance that are correlated with the
overall measure. To capture a uni-dimension of performance, the eight sub-scale items
were summed up to construct a composite performance scale. The combined scale was
significantly correlated (r= 0.840; p <0.01) with the overall rating (item 9).
BudgetaryParticipation. This variable was defined as the manager's degree of in-
fluence on the budget. A three-item version of a participation measure employed by
Milani (1975)was used. (This measure is similar to the scale of participatory decision
making used by Abdel-halim and Rowland [19761and is based on Vroom [1960] and
Vroom and Mann [1960].)
A factor analysis of the scale revealed only one factor with an eigenvalue greater
than 1, which explained 76.9 percent of the total variance indicating that only one
construct was being measured. The reliability coefficient computed for the scale in this
study was 0.85. An overall measure of budgetary participation was constructed by
summing up responses to the three individual items.
Job-RelevantInformation(JRI). The objective of this measure is to assess the extent
to which managers perceived information availability for effective job-related deci-
sions. Managers with adequate JRIare expected to perceive and report that they have
adequate informationto accomplish their job-relatedobjectives and to evaluate impor-
tant decision alternatives.
Based on O'Reilly's (1980) information overload index, a scale was developed for
use in this study, with the wording modified to fit the context of this study (Robertsand
O'Reilly 1974). Several colleagues, working managers, and executive MBA students
with relevant work experience were asked to comment on the scale and concurred on
its face validity.
Factor analysis confirmed the single-factor structure of the scale. Only one factor
was present with an eigenvalue greater than 1 explaining 64.3 percent of the total
variation..The reliability coefficient calculated for the scale was 0.72. For subsequent
analysis, the items were summed up.
EnvironmentalVolatility. For this study, volatility is defined as change or vari-
ability in the organization's external environment (Tung 1979). Previous studies of en-
vironmentalvolatility have focused on variabilityof accounting variables (e.g., sales or
income) at the industry level. Tosi et al. (1973) argue that more stable patterns in such
measures across time indicate more stable environments and thus are easier to predict
(Bourgeois 1985).
Tosi et al. operationalized volatility by using the following three variables: (1)
marketvolatility, the coefficient of variation of net sales; (2)technological volatility, the
coefficient of variation of the sum of research and development and capital expendi-
tures divided by total assets; and (3) income volatility, the coefficient of variation of
profits before taxes (used as a composite measure to capture other sources of volatility).
The measures were further verified by Snyder and Glueck (1982). The coefficient of
variation (the variance is standardized by the magnitude) is used because it allows
comparisons across industries of different sizes.
In a later study, Bourgeois (1985)suggested using first differences of the Tosi et al.
measure. Bourgeois argued that a high but constant, and thus predictable, rate of
Kren-Budgetary Participation and Managerial Performance 517

change could produce a high coefficient of variation. However, it is not only the rate of
change that creates volatility, but also the unpredictabilityof the change (Downey and
Slocum 1975; Milliken 1987). Bourgeois argued that the coefficient of variation of first
differences provides a better measure of discontinuities. Thus, for this study, market,
technological and income volatility were measuredby using first differences as follows:

a CV(Xi)
volatility (Xi)= i=_
where Xi = market, technological, or income variable and n = number of companies in
the industry (not including the sample company) and,

CV(Xi) =5

where Zk = (Xik -Xik-l), and Xik = market,technological, or income variable in year k.

For each firm in the sample, industry-level statistics were calculated by using all
other companies listed on Standard and Poor's COMPUSTATdata file with the same
two-digit SIC code. In conformance with previous research, industry-level measures
were used because they seem most relevant to the key dimensions of a company's exter-
nal environment (Bourgeois 1985; Tosi et al. 1973; Tung 1979). The industry-level
measure used in the analysis to be shortly presented was also significantly correlated
with a correspondingly calculated company-level measure (r=0.321; p<0.05).
Factor analysis of the three resulting variables revealed only one factor with an
eigenvalue greater than 1 (explaining 68.1 percent of the total variance), which indi-
cates that only one construct was measured. Thus, the three variables were summed up
to provide an overall measure of volatility.
Of the 63 companies in the sample, 17 were significantly diversified conglomerates
or obtained more than 20 percent of their total revenues from unrelated operations as
indicated by segment disclosures in annual reports. Because it was difficult to identify
an appropriateindustry reference group for these diversified companies, the analysis of
volatility effects excluded these 17 companies (representing21 respondents).Thus, for
subsequent analysis of volatility effects, the sample size was reduced to 59.

III. Analysis and Results

Table 1 provides descriptive statistics for the measured variables in the study.
Although the participation measure is skewed (the mean is near the top of the variable's
range),the managers in this sample were at the highest level of the corporatehierarchy,
suggesting that participation might be high (Searfoss and Monczka 1973). Intercorrela-
tions between the measured variables are shown in table 2. The significant, zero-order
correlation between participation and JRI(r= 0.397; p < 0.01) is consistent with hypoth-
esis Hi, as is the correlation between JRIand performance (r= 0.466;p < 0.01). To inter-
pret the latter coefficient in the context of hypothesis H1, however, a path-analytic
approach is used. The zero-ordercorrelation between budgetaryparticipationand per-
518 The Accounting Review, July 1992

Table 1
Descriptive Statistics for Measured Variables
(n =80)

Hypothetical Actual Standard

Variable Range Range Mean Deviation

Participation 3-21 8-21 18.2 3.0

Information 3-21 9-21 15.9 3.0
Volatility na 8.9-23.2 15.7 3.6
(n = 59)
Performance 8-56 34-56 45.0 4.7

Table 2
Correlation Matrix for Measured Variables
(n =80)

Variables 2 3 4

1. Volatility -0.044 -0.122 0.032

(n = 59)
2. Participation - 0.397* 0.214
3. Information - 0.466*
4. Performance

* Significant at p<0.01 (two-tailed test).

formance (r=0.214; p<0.07) is weakly significant, which will be explained more

clearly by participation's effects on JRI.
Participation, JRI, and Performance
Hypothesis H1 posits that JRI will act as an intervening variable to explain the
relationship between budgetary participation and managerial performance. This hy-
pothesis is tested by using the path analysis model summarized in figure 1.1
Each path coefficient, pij, indicates the impact of variable j in explaining the
variance in variable i. The values of the path coefficients can be interpreted in units of
standard deviation. For example, the path coefficient of P21 = 0.397 in figure 1 indicates
that for every standard deviation increase in the participation measure, the data predict
a 0.397 standard deviation increase in JRI.

t Path analysis is an application of regression and correlation appropriate for estimating a series of interre-
lated parameters (Wonnacott and Wonnacott 1981). It allows statistical analysis of the direct contribution of
participation to performance and its indirect contribution through JRI. This is accomplished by estimating the
values of the path coefficients designated pj in figure 1.
Kren-Budgetary Participation and Managerial Performance 519

A series of regressions are used to estimate the path coefficients, according to the
Z2 = P21 Z1, (1)
Z3=p31Z1 +p32Z2, (2)

where, Z, is the measure of participation, Z2 is JRI, and Z3 is performance. Each

variable is standardized to a mean of zero and a standard deviation of 1.
The path coefficients also can be used to decompose the total relationship between
two variables (i.e., performance and participation) into direct and indirect effects (i.e.,
through JRI).The total relationship can be measured with the zero-order correlation
coefficient, rij. Thus,
r12 =P21; (3)

r23=p32+p31rl2; (4)

r13 =p31 +p32r12- (5)

The subscripts 1, 2, and 3 refer to the variables of participation, JRI, and perfor-
mance, respectively (see fig. 1). The first term on the right-handside is an estimate of
the direct effect (the path coefficient), or the effects through unobserved intervening
variables. The second term is an estimate of the indirect effect or, in the absence of pre-
dicted indirect effects, the second term provides an estimate of spurious effects. Thus,
for this study, equation (4) allows decomposition of the total relationship between JRI
and performance (r23) into a direct effect (P32) and a spurious effect (p31r12). The
spurious effect results from participation, which is a common antecedent of both JRI
and performance. Equation (5) allows decomposition of the total relationship between
participation and performance (r13) into a direct effect (P31) and the indirect effect
through JRI (p32r12). Hypothesis Hi posits that the indirect effects of participation
through JRI, will predominate.
The results of estimating equations (1)and (2)for the total sample are shown in table
3 and figure 1. The direct path between participation and performance (P31) was not, as
expected, statistically significant. However, the path coefficients between participation
and JRI (P21) and between JRI and performance (P32) were significant at conventional
levels. Both regression models were significant, also at conventional levels.
The decomposition of the linkages in the model (eqs. [3], [4], and [5]) is shown in
table 4. The prediction of hypothesis Hi was that most of the effect of participation on
performance would be indirect (throughJRI) with little direct effect. The results shown
in table 4 (eq. [5]) support this prediction. The direct effect of participation on perfor-
mance (0.034) is small relative to the indirect effect through JRI (0.180).Thus, for every
standard deviation increase in participation (eq. [3]), JRI increases by 0.397 standard
deviation, and for every standard deviation increase in JRI (eq. [4]), performance
increases by 0.466 standard deviation. In total, for every standard deviation increase in
participation, performance increases by 0.180 standard deviation. In addition, only a
small portion of the relationship between information and performance (eq. [4]) is
spurious (0.014) relative to the direct effect (0.452). Overall, the results are consistent
with hypothesis Hi.
520 The Accounting Review, July 1992

Table 3
Results of Path Analysis

Total Sample High Volatility Low Volatility

Dependent Path (n = 80) (n = 30) (n = 29)
Variable/ Coefficient
Link to (Fig. 1) Estimate t-statistic Estimate t-statistic Estimate t-statistic

Equation (1):
Participation P21 0.397 3.77** 0.442 2.61* 0.252 1.30

Equation (2):
Information P32 0.452 4.06** 0.606 3.60** 0.607 3.50**
Participation P31 0-034 0.31 0.029 0.17 -0.121 -0.71

Note: For equation (1) (Information): total sample, R-square=0.158, F= 14.24**;

high volatility, R-square=0.195, F=6.80*;
low volatility, R-square=0.063, F=1.69.
For equation (2) (Performance): total sample, R-square=0.218, F=10.44**;
high volatility, R-square = 0.384, F= 8.41* *;
low volatility, R-square=0.339, F=6.15**.
* Significant at p<0.05 (two-tailed test).
** Significant at p<0.01 (two-tailed test).

The Effects of Environmental Volatility

Hypothesis H2 posits that when volatility is high, (1) the level of participation will
be higher, (2) the link between participation and JRI (p21) will be stronger, and (3) the
link between JRI and performance (p32) will be stronger. As described above, volatility
effects were examined with a reduced sample size of 59 to eliminate diversified com-
panies from the sample.
To examine hypothesis H2a, the zero-ordercorrelation between volatility and par-
ticipation was calculated. As shown in table 2, the correlation was not significant.
Thus, the data do not support hypothesis H2a; managers did not report greater
participation as volatility increased. The implications of this finding become clearer as
the two remaining predictions are examined below.
To examine the effects of volatility on the link between participation and JRIand
between JRI and performance, the sample was split at the median of the volatility
measure and the path coefficients in figure 1 were recalculated for the two sub-
samples. The results of estimating equations (1) and (2) at high and low levels of
volatility are shown in table 3 and in figure 2. As with the total sample, the direct path
linkage between participation and performance (p31) is not statistically significant at
either high or low levels of volatility. In fact, the point estimate is negative at the low
level of volatility.
Consistent with hypothesis H2b, the path coefficient between participation and JRI
(P2,) is statistically significant at the high, but not at the low, level of volatility. Com-
bined with the finding that managers did not participate more as volatility increased,
Kren-Budgetary Participationand ManagerialPerformance 521



66 C 6s

0; LtO N c
Cl LO 0



Cl4 N.
C6 Cs

o I~~~~~~~~~~~~~~~~~c

LO c


6C0 0C

co CZ Q 0

C r-. Lo .~~~~a
E-t. ci0-"
522 The Accounting Review, July 1992

Figure 2
Research Model at High and Low Levels of Environmental Volatility

Panel A. High Volatility:

,'V ~
P21 = 0.442 ,, - _ P32 =0.606

PARTICIPATION (Z I) - - - - - - - - - - - - - PERFORMANCE (Z3)

P31= 0.029

Panel B. Low Volatility:


P21= 0.252 , - __ P32 0.607

PARTICIPATION (Z,) - - - - - - - - - - - - - - - - - - - PERFORMANCE (Z3)

P3= -0.121

this is consistent with the proposition that participation was used more effectively to
acquire JRI when volatility was high. However, a general linear test (Neter and
Wasserman 1974) indicates that the path coefficients (P21) at the two levels of volatility
are not significantly different from each other (F2,55 = 1.12), so the support for hypoth-
esis H2b is ambiguous.
The results do not support hypothesis H2c that the link between IRI and perfor-
mance would be stronger at the high level of volatility. The path coefficients between
JRI and performance (P32) are highly significant at both levels of volatility and are not
significantly different from each other, which indicates that, contrary to expectations,
the relationship between JRI and performance is unaffected by the level of volatility.
The decomposition of the model linkages (eqs. [3], [4], and [5]) for high and low
levels of volatility is shown in table 4. At both levels, the indirect effect of participation
on performance through information is greater than the direct effect (eq. [5]). When
volatility is high, the indirect effect of participation (0.268) is greater than the corre-
sponding indirect effect when volatility was low (0.151). This is consistent with expec-
tations that participation would be more strongly associated with performance when it
is more useful in providing IRI, as when volatility is high. Once again, however, strong
evidence of volatility effects is not present because estimates of the regression model in
equation (2) are not significantly different across levels of volatility (F353 = 0.70).
Kren-Budgetary Participationand ManagerialPerformance 523

IV. Summary and Conclusions

The objective of this study was to examine JRIas an intervening variable in explain-
ing the relationship between budgetary participation and individual performance. The
results are consistent with the proposition that budgetary participation facilitates JRI
acquisition by managers, and that JRI, in turn, is associated with improved perfor-
mance. This study and other recent research support the view that the cognitive effects
of participatorybudgeting may be more consistent determinants of performance than
the motivational effects (Brownell and McInnes 1986; Chenhall and Brownell 1988;
Mia 1989). An important component of these cognitive effects appears to be related to
JRIacquisition and use. In that regard,this study provides a link to the results reported
by Mia (1989) and Chenhall and Brownell (1988). In both studies, the information
effects of participation played an important conceptual role, as it did in this study. Fur-
thermore, Brownell and McInnes (1986, 590) recognized explicitly that participation
provided information to clarify the relationship between formal rewards and budget
goals, which suggests another important information role for participation. Additional
research is needed in this area, with consideration of job difficulty, role ambiguity,and
reward system.
Overall, the effect of participation on performance, through JRI,persisted across
the levels of environmental volatility and was somewhat more pronounced when envi-
ronmental volatility was high, although more conclusive evidence is needed to confirm
predictions about volatility effects. A larger sample may be needed, or a longitudinal
study of organizations in transition in response to volatility changes.
Hypothesis H2a, which posited a positive relationship between volatility and par-
ticipation, was not supported. This may indicate that organizations fail to recognize
budgetaryparticipation as an efficient means to increase the JRIavailable to managers.
Alternate organizational mechanisms, such as enhanced management information
systems, performance or process feedback (Early et al. 1990), or expert support staff
may be more efficient responses to volatility. Also, organizations may sometimes fail to
evaluate the level of volatility accurately which may contributeto inadequate responses
to information needs (Bourgeois 1985).
Volatility had only marginal effects on managers' responses within the model (hyp.
H2b and H2c). This may be a consequence of perceptual differences between managers
in the high and low volatility groups. The former group may make greater efforts to
acquire and use JRI,but since they face greater information processing demands, their
perception of the level of JRImay not be greaterthan managers with more limited infor-
mation needs. In addition, organizational budgetary systems may differ as volatility
differs (Merchant1984). Volatility could affect budgetaryprocedures through its effects
on organizational factors and thereby affect JRIacquisition opportunities.
Several limitations of this study should be identified. Common-methodbias from
self-reported data may lead to overestimates of model relationships, particularly
between the information and participation measures. Nonresponse bias may also have
had unknown effects on the results. Another limitation, common to correlational
studies, is that the results are open to alternate interpretations.Cross-sectionalanalysis
does not provide clear-cut evidence to confirm predictions of causal relationships. For
example, an alternate interpretationof the relationship between participation, JRI,and
performance could be that well-informed managers perform better and are conse-
524 The Accounting Review, July 1992

quently allowed to participate more in budgeting. However, such an interpretation is

inconsistent with conclusions of previous accounting research (Chenhalland Brownell
1988; Mia 1989) and studies in other disciplines (Campbell and Gingrich 1986).
Campbelland Gingrich's results are based on a field experiment which provided better
control over confounding variables and so give stronger support for predictions of

Appendix A
List of Industries Included in the Sample

Numberof Numberof
Industry Companies Respondents

Food and kindred products 3 4

Tobacco products 1 2
Lumberand wood products 1 1
Furnitureand fixtures 1 1
Paper and allied products 8 11
Printing and publishing 1 2
Chemicals 13 17
Petroleum refining 1 1
Rubberand plastic products 2 4
Stone and concrete production 2 2
Primarymetal industries 2 2
Metal fabrication 4 5
Commercialmachinery 9 11
Electrical equipment 7 8
Transportationequipment 6 6
Photographyequipment 2 3

Totals 63 80

Appendix B
Abbreviated Research Questionnaire
Q1. I am involved in setting all portions of my budget. (Responseanchors:1 strongly disagree, 7 = strongly
Q2. My budget is not final until I am satisfied with it. (Response anchors: 1 -strongly disagree, 7 = strongly
Q3. My opinion is an important factor in setting my budget. (Response anchors: 1=strongly disagree,
7 = strongly agree.)
Q1. I am always clear about what is necessary to perform well on my job. (Response anchors: 1=strongly
disagree, 7= strongly agree.)
Q2. I have adequate information to make optimal decisions to accomplish my performance objectives.
(Responseanchors: 1 = strongly disagree, 7 = strongly agree.)
Q3. I am able to obtain the strategic information necessary to evaluate important decision alternatives.
(Responseanchors: 1 = strongly disagree, 7= strongly agree.)
Kren-Budgetary Participationand ManagerialPerformance 525

Appendix B-Continued
Abbreviated Research Questionnaire

Rate your performance as a manager on the following tasks. (Response anchors: 1 =below average perfor-
mance, 7=above average performance.)
1. Planning
2. Investigating
3. Coordinating
4. Evaluating
5. Supervising
6. Staffing
7. Negotiating
8. Representing
9. Rate your overall performance

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