The Effect of Budget Emphasis and Information Asymmetry on the Relation between Budgetary Participation and Slack Author

(s): Alan S. Dunk Reviewed work(s): Source: The Accounting Review, Vol. 68, No. 2 (Apr., 1993), pp. 400-410 Published by: American Accounting Association Stable URL: . Accessed: 03/04/2012 11:51
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68.and the degree of information tween superiorsand subordinates. Ken Moores. Submitted March 1991. David Otley. Thanks are due to George Cooney. and to participants at workshops at the Flinders University of South Australia and the University of Western Sydney. Merchant may lead to a (1985a).budget emphasis. and informationasymmetryare high (low). and vice versa. budgetary slack is of defined as the express incorporation budget amounts that make it easier to attain. Nepean.the linkbetween directlyto participationand slack is equivocal. 2 April 1993 pp. 400 . Accepted December 1992. Williamson (1964) concluded that subordinate managers will try to influence the budget-setting process and obtain slack budgets. Managers may build slack into budgets by strategies that understaterevenues and overstate costs (Schiff and Lewin 1970). Nepean A SYNOPSIS AND INTRODUCTION: majorconcern in the literatureis by that participation subordinatesmay resultin the generationof slack budgets (Antle and Eppen 1985). Lukka(1988) argued that a high degree budgets gives subordinatemanagersthe opportunityto contribute of participation the creationof slack. In conformance with Merchant (1985a). and Young (1985). slack will be high (low). 400-410 The Effect Relation of Budget Between Emphasis the Budgetary Slack and Information Asymmetry on Participation and Alan S. In one of the earliest studies. The literatureproposes a link between participationand budgetary slack throughtwo variables:superiors'budget emphasis in their evaluation asymmetrybeof subordinateperformance. for their comments on previous drafts of this project.When participation. and Onsi (1973) provideevidence that participation which can be attributedto the positive communication reductionin slack. Dunk University of Western Sydney. The helpful comments of the anonymous referees are also gratefully acknowledged. Ken Merchant. However. between managersso that subordinatesfeel less pressureto create slack. Lukka(1988). whose contribution and support was invaluable.THE ACCOUNTING REVIEW Vol. Graeme Harrison. Special thanks are reserved for Peter Brownell. since Cammann (1976). No. set Whether budgetaryslack is a likelyoutcome in all participatively is a matterof conjecture.

e. The next section details the method. Information asymmetry exists only when subordinates' exceeds that of their superiors. Local information is an example of information asymmetry (Baiman and Evans 1983. budget emphasis in performance induces the creation of budgetary slack (Baiman and Lewis 1989). If subordinates perceive their rewards as dependent on budget attainment. which could lead to budgets with slack (Christensen 1982. the conclusions. and is followed by a presentation of the results.Dunk-The Effect of Budget Emphasis and InformationAsymmetry 401 For this study. In the following section. Measures of budgetary slack and information asymmetry were developed. Waller 1988). Merchant 1985b. Young 1985). Christensen 1982). Previous Literature and Theoretical Development rT 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. Support was found for low (high) slack when the predictors are high (low). Budgetary participation. Finally. implications. Budget emphasis. If are likely to budget emphasis and information asymmetry are high. in the budget-setting Subordinates' participation process gives principals the opportunity to gain access to local information (Baiman 1982. Baiman and Lewis 1989. But agents may misrepresent or withhold some of their private information. the literature is reviewed and the theory is developed. of subordinates participation may give superiors information asymmetry may enable slack to be increased in participatively set budgets. 1970. HE remainder of the article is organized as follows. The Interaction of Information Asymmetry. e. while access to private information. subordinates attempt to negotiate slack budgets (see. which arises when the subordinate has information relevant to the decision process associated with budgeting (Kren information and Liao 1988). The primary argument for agents' efforts to build slack in their budgets is to enhance their compensation prospects. Penno 1984. metropolitan area.. Baiman and Evans 1983. Key Words: Budgetary slack. Budget Emphasis. Schiff and evaluation Lewin 1968. and limitations of the study are discussed. and Participation.g. In all cases. If information asymmetry is low and budget emphasis is high. Pope 1984. subordinates will have the incentive to create slack. Australia. Information asymmetry. 1988. Penno 1984). but will not be in a position to obtain it (Chow et al. or reveal some of their private Magee 1980) which allows subordinates to communicate information that may be incorporated into the standards or budgets against which their performance would be assessed (Baiman and Evans 1983). Waller 1988).g. Thus. Coughlan and Schmidt 1985. Budget Emphasis. Data Availability: The data are available from the author. Hence. samples of managers were drawn from manufacturing organizations in the Sydney. they may try to build slack into their budgets through the participation process (see. Lowe and Shaw 1968.. participation in the budget-setting process will need to be high for the subordinate to have the opportunity to build in slack (Lukka . I.

this study relies upon random sampling to control for the possible confounding effects of risk preferences on the results (Dominowski 1980. The respondents' mean age was 42 years.: There is no interaction between budgetary participation. 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. Method To test this hypothesis. As such. Variable Measurement An Analysis of the Draft Measure of Budgetary Slack. 1986).5 level. The hypothesis in its null form is stated as follows: H.2 A factor analysis of the draft measure indicated that items 1 and 3 did not load on the factor at the 0. The items in the instrument are based on the definition of budgetary slack employed in this study. an overall response rate of 67 percent. II. irrespective of the level of budget emphasis and information asymmetry. their average length of experience was 13 years. the prospects for subordinates' building slack into their budgets are restricted. which was the criterionfor item inclusion. Australia. e. Waller 1988. .402 TheAccounting Review.therefore. the means for generating this type of data are difficult to ascertain.' Each firm was contacted by telephone. A questionnaire with a cover letter and reply-paid self-addressed envelope was mailed to each manager. 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. and budget emphasis that affects budgetary slack.g. information asymmetry. April1993 1988). It was expected that companies with fewer employees were unlikely to have clearly defined areas of responsibilityfor managers. 2 The study relies upon managers' perceptions of the level of slack in their budgets. and the mean number of employees in their areas of responsibility was 102.both items ' The findings of experimental research suggest that subjects' risk preferences affect the creation of slack (see. Monette et al. Thus. When participation is low. The draft six-item measure of budgetaryslack is reported in appendix A. they focus on the ease with which budgetary targets can be achieved. Although more objective data on slack levels might be desirable.A total of 61 firms were selected for inclusion in the sample. The items are anchored by (1) strongly disagree and (7) strongly agree. 1988. Young 1985). and a telephone follow-up was made to promote a higher response rate. Chow et al.. but measures of budgetary slack and information asymmetry required development. metropolitan area using the KompassAustralia.(1988)register of firms. This follow-up also verified that the targeted managers had responded to the questionnaire themselves. No restriction was placed on the areas of responsibility from which managers could be drawn for sampling purposes. measures of budget emphasis and budgetary participation were drawn from the literature. Responses were received from 79 managers. While Waller (1988) controlled risk preferences experimentally. and 118 managers were personally requested to contribute to the study. they had held their current positions on average for 4.5 years.

Chow 1983. Chow et al.3 adequacy Based on these findings. 5. which had an eigenvalue of 1. and to then evaluate the findings of a further factor analysis based on the remaining five items. 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. and the Cronbach alpha is virtually identical to that of the originally proposed measure (0. However. as determined by their intercorrelations. Respondents' scores for information asymmetry ranged from 18 to 42. Since item 3 had a much lower loading than item 1. In this analysis. Budget Emphasis. 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. e. and 6) indicated that they loaded above 0. 4. 5.1 percent of the variation in the underlying variable. and 6.g. Waller and Chow 1985).5 level.932 (p < 0. A score of 24 indicates zero information asymmetry.3878 and explained 34. 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. it was excluded from the instrument.5. An Analysis of the Measure of InformationAsymmetry. the findings enabled a more sharply focused measure. The Cronbach alpha for the six-item instrument is 0. according to the definition in this study. Since there is no measure of information asymmetry designed for use in field studies.7 percent of the variation in the (KMO)measure of sampling underlying variable. Chow et al. In addition. whereas a response of (7) would indicate that the subordinate had more information than the superior.7648. A subordinate manager had to score more than 24 on the scale for there to be any information asymmetry.4086 and explained 40.Asymmetry Emphasis Information and Dunk-TheEffectof Budget 403 were subject to exclusion from the instrument. the Kaiser-Meyer-Olkin was 0. 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. a seven-point 3 The KMO measure assesses the extent to which the items are psychometrically related.5 on a single factor. 1988. Because item 1 again did not load on the factor at the 0. 4. there was no information asymmetry).. A factor analysis revealed that the items loaded on a single factor. The six items in the instrument are based on the definition of information asymmetry as well as on suggestions in the literature(see. A factor analysis of the remaining four items (2. a measure of budgetaryslack was construced from items 2.5827.g. . Hopwood's (1972) eight-item measure of superiors' evaluation style was used to assess budget emphasis. one was developed and is reported in appendix B.6813).79. all five items loaded on a single factor. e. Table 1 presents descriptive statistics for this measure. Seven managers whose scores were less than 24 were excluded from the analysis since the information differential was in favor of their superiors (i.001). The KMOmeasure of sampling adequacy was 0. a correlation matrix is acceptable for factor-analytic examination (Kaiser and Rice 1974). As a result of Brownell's (1982)observation that many of his respondents failed to complete the ranking properly. Although the correlation between this four-item measure and the originally proposed six-item measure is 0. The boundaries for the KMO are minus infinity and plus 1 (Kaiser 1970).' Descriptive statistics for the instrument are in table 1. Baiman and Evans 1983. The items reflect such a perspective. which had an eigenvalue of 2. 1988). Provided the measure of sampling adequacy is greater than 0... the decision was made to remove only item 3 first.e.

the descriptive statistics are similar to those for the primary sample. which further attests to the reliability of the measure.01).9 percent of the variation in the underlying variable. The KMOmeasure of sampling adequacy was 0. their mean experience in the areas they managed was 12 years. which had an eigenvalue of 3. A factor analysis revealed that all the items loaded on a single factor. Use of the same sampling criteria enabled an assessment of the stability of the measures across samples and time periods.86.D.972 5. the 40 responses could not be added to the primary sample.8892 0. for which Brownell (1983) reported a correlation of 0.528 31. 46). they had held their present positions an average of four years.a. Participation Information asymmetry Budget emphasis 0.5362 and explained 58. The Cronbach alphas are 0. 191.69 for the revised measure of budgetary slack.110 0. The reliability results also were consistent with results obtained from the primary sample. To obtain further evidence of the reliability of the instruments measuring budgetary slack and information asymmetry. of which 40 were returned. The item ''meeting the budget" alone was considered an indicator of budget emphasis.147 InformationAsymmetry 0. the Cronbach alpha is 0. new questionnaires were sent to an entirely new sample of managers subsequent to hypothesis testing.806 7. .88 for information asymmetry and 0.404 The Accounting Review. Brownell (1983) reported a Cronbach alpha of 0.74 (p < 0. A Further Analysis of the Measures of Budgetary Slack and Information Asymmetry. Since this further analysis focused only on the measures of budgetary slack and information asymmetry. 4. and the average number of employees in their areas of responsibility was 78.061 Likertscale was used in this study for each of the eight criteria in the measure.778 S.361 31. 5Evidence of the validity of the instrument has been obtained by correlating it with the Hofstede (1968) single-choice measure. Except for the smaller number of employees managed. Budgetary Participation. Descriptive statistics for the instrument are presented in table 1.7923 n.393 5.096 1. Rosenthal and Rosnow 1991. A total of 49 additional questionnaires were mailed. reliability coefficients consistent with those previously obtained would show the stability of these instruments (Nunnally 1981. Subordinates' degree of participation was assessed by using the Milani (1975) six-item measure.5 In this study. Descriptive statistics for the measure are presented in table 1. April 1993 Table 1 Descriptive Statistics: Independent and Dependent Variables Actual Variable Budgetary slack Budgetary participation Information asymmetry Budget emphasis Bivariate Correlations: Mean 13.88.8758.The mean age of the respondents was 43.6833 0.153 Range 4-25 6-42 24-42 2-7 Theoretical Range 4-28 6-42 24-42 1-7 Cronbach Alpha 0.

052 0.040 0.459 0.057 0.92 1.D. regression. since no meaningful origin can be given to non ratio-scaled data.32. it appears that slack is low when 6 Factor scores were also extracted with the Bartlett.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).10 -2. Since it was hypothesized that the three independent variables would interact to affect budgetary slack. indicate that b7 is significant at p=0.862 0.p = 0. t = -2.94 -1. F7a64= 3. + b2X2+ b3X3+ b4X1X2+ b5XiX3+ b6X2X3+ b7XX2X3+ e.018 85. b7.79 0.065 0. their partial regression coefficients can be made to equal zero.30.90.723 2.Dunk-The Effect of Budget Emphasis and InformationAsymmetry Table 2 Results of the Hypothesis Test Variable Coefficient Value S.400 -4. b7 remained significant.050 0.600 0.590 14. He illustrated that by changing the origins of the measures of the predictors.=budgetary participation. -28. as reported in table 2. and Anderson-Rubin methods as provided by SPSSX.350 2.869 -5. t-statistics 405 p-values Intercept Participation bo bi b2 b3 b4 170. X. The exclusion of seven managers from the analysis whose information asymmetry scores were below 24 made no difference in the results.029 III.163 0. X2=information asymmetry.98 1. p = 0.7 As b7 in table 2 is significant and negative.035 and that the model as a whole explains 30 percent of the variation in budgetary slack (p = 0.001).444 0.88 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. and X3=budget emphasis. The results. (1) .933 2. would be statistically significant. The findings from a series of regression analyses based on the derived sets of factor scores were consistent with those using raw scores.078 Information asymmetry Budgetemphasis Participationx information asymmetry Participationx budget emphasis Information asymmetryx budget emphasis Participationx information asymmetryx budget emphasis Note: R2=0.001.16 0.023.082 0.010 0. it was expected that the coefficient of the three-way interaction term. where: Y=budgetary slack. n = 72. presented in table 2.035 b5 b6 b7 -0.00 -1.013 -1. Results The following model was used to test the hypothesis: Y= bo+ bX.059 0.

981) (n = 7) 12. The results provide evidence for the utility of participative budgeting. but in a direction contrary to expectations. Conclusions The results of this study show that the relation between participation and slack is contingent upon budget emphasis and information asymmetry.7 (6. which shows the mean. the results suggest that participation alone may not be sufficient. Measures of two constructs had to be developed.406 The Accounting Review.357) (n = 15) Note: The standard deviation is given in parentheses after the mean score. and budget emphasis dichotomized at their means was constructed. and little support for the view that high participation may result in increased slack when the other two predictors are high. and budget emphasis are all high.0 (3. information asymmetry. it could be argued that the findings obtained in this research are partly attributable to a poor measure of the dependent variable .670) (n = 7) 16. information asymmetry. item analyses. and highest when all the predictors are low.081) (n = 11) 15.1 (4. The findings suggest that slack reduction results from participation.510) (n = 5) 12. participation.885) (n = 11) 10. standard deviation.6 (2. and their validation has not been independently established. The two graphs illustrate that slack is lowest when information asymmetry. except when budget emphasis is low. IV.0 (5.8 (4.1 (4. The information in table 3 was used to graph the three-way interaction shown in figure 1. and that slack is highest when the predictors are all low. a three-way table of slack scores based on participation. indicates that slack is lowest when all the independent variables are high. Table 3. Although participation may induce subordinates to incorporate slack in budgets. To investigate this finding. and budget emphasis are all high.268) (n = 9) High Participation 13. participation. construction of the measures of budgetary slack and information asymmetry from the literature reviews. In addition. The graphs also illustrate that slack is higher when budget emphasis is low rather than high.9 (3. The results of the study may be subject to a number of possible limitations. Also. and factor analyses may have driven the results. April 1993 Table 3 Three-Way Interaction: Table of Mean Scores for Budgetary Slack Low Participation Low budget emphasis Low information: asymmetry High information asymmetry High budget emphasis: Low information asymmetry High information asymmetry 16. and sample size for budgetary slack in each category.370) (n = 7) 15. This finding runs contrary to the expectation developed from the literature.

It may also be the case that cross-sectional survey methods are not sufficient for the investigation of budgetary slack. As a construct. High InformationAsymmetry: Slack 407 18 16 14 -14 18 low budget emphasis 16 -high budget low budget emp _ 12 10 - highbudget emphasis 121210 - emphasis Low Participation High Low Participation High (budgetaryslack). . the results are potentially only generalizable to that population. managers' questionnaire responses may have been founded on an emotive platform and the results could be prejudiced. slack may be seen in both a clinical and an emotive sense. Although the interest here is in the former concept. hence. Another limitation of the study is that data were drawn only from firms located in the Sydney metropolitan area. Case studies may assist in providing additional information on the circumstances in which slack may occur. Low InformationAsymmetry: Slack Panel B. given the nature of the construct.Dunk-The Effect of Budget Emphasis and InformationAsymmetry Figure 1 Three-Way Interaction Graphs Panel A.

* 4.408 The Accounting Review. 6. 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 Appendix B Information Asymmetry Measure Please respond to each of the following questions by circling a numberfrom 1 to 7. Strongly agree 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1. based on the following scale: 1. Moderatelyagree 7. I have to carefully monitor costs in my area of responsibility because of budgetary constraints. Please indicate the extent of your agreement with each statement by circling a number from 1 to 7. 3. In comparison with your superior. Mildly agree 6.* 2. April 1993 Appendix A Budgetary Slack Measure The following statements relate to the budgetaryenvironment in which you work. Standards set in the budget induce high productivity in my area of responsibility. Strongly disagree Moderately disagree Mildly disagree Neutral 5. In comparison with your superior.* *Responses to these items were reverse-scored. 2. who is in possession of better information regarding the activities undertaken in your area of responsibility? 1 My superior has much better information 2 3 4 We have about the same quality of information 5 6 7 I have much better information 2. 3. 4. Budgets set for my area of responsibility are safely attainable. Budgetarytargets have not caused me to be particularlyconcerned with improving efficiency in my area of responsibility. based on their individual scales: 1. 5. In comparison with your superior. who is more certain of the performance potential of your area of responsibility? 1 My superior is much more certain 2 3 4 We are about equally certain 5 6 7 I am much more certain Continued . Budgets for my area of responsibility are not particularlydemanding. who is more familiar with the input-outputrelationships inherent in the internal operations of your area of responsibility? 1 My superior is much more familiar 2 3 4 We are about equally familiar 5 6 7 I am much more familiar 3. Targets incorporated in the budget are difficult to reach.

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