Read the academic article that discusses the “Antecedents and Consequences of Participative Budgeting” one of the most common researched topics in Management Accounting. After reading the article, in your own words, try to summaries it covering the following items: The article issues and objectives. Research method(s) and methodology used. Findings and impact on the field.
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Q1. Read the academic article that discusses the “Antecedents and Consequences of Participative Budgeting” one of the most common researched topics in Management Accounting. After reading the article, in your own words, try to summaries it covering the following items:
The article issues and objectives.
Research method(s) and methodology used.
Findings and impact on the field.
Write no less than 300 words.
(5 Marks)
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Q2. What is Grounded theory? Discuss its application in Accounting research.
(5 Marks)
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Q3. Differentiate between the three types of Validity (Internal, External and Construct)
(5 Marks)
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JMARVolume FiveFaU ]99315Antecedents and Consequences ofParticipative Budgeting: Evidence onthe Effects of AsymmetricalInformationMichael D. ShieldsSan Diego State UniversityandS. Mark YoungUniversity of Southern CaliforniaAbstract: A review of empirical studies on participative budgeting indicates thatmost have focused on its consequences (e.g., attitude, motivation, performance,satisfaction) rather than its antecedents. We suggest that the mixed results ofparticipative budgeting research are due to incomplete models of the process.Further, we propose that researchers develop theories that tie particular ante-cedents of participative budgeting to specific consequences. Next, we developa model that uses information asymmetry between local and central managementas the antecedent condition and link it to: (1) participation of local managers insetting their budgets, (2) budget-based incentives and (3) firm-wide performance.Data to test these relationships were gathered from corporate controllers of theStandard and Poor’s 500, and the relationships were tested using path analy-sis. Three of the four hypotheses were supported—^the effects of informationasymmetry on participative budgeting, participative budgeting on budget-basedincentives and the effect of budget-based incentives on firm-wide performance.The fourth hypothesis—the effects of information asymmetry on budget-basedincentives was only marginally supported. We also propose three other pos-sible antecedents of participative budgeting that can be investigated: (1) a de-sire to positively influence individual attitudes, behavior and performance, (2) toreinforce a particular culture, and (3) to provide a mechanism for organizationallearning.A decade ago, Brownell [1982a] developed a framework for organizingresearch on parUcipatlve budgeting that divided the literature into two parts.The first specified antecedent conditions which created a demand for par-ticipation such as the environment (e.g.. uncertainty), organizational vari-ables (e.g.. structure, technology), and national culture, while the secondfocused on participation’s consequences such as Increased motivation,commitment, satisfaction and performance. In his review, he concludedthat the [p. 146-7],This paper has beneJUedfrom comments received from Bob Capettinl Robert Chenhall.Chee Chow. Ken Merchant. Sarah Bonner. two anonymous reviewers and partici-pants at the accounting workshop at Utah, the 1991 Management Accounting Re-search Conference in Atlanta, and the Second European Management Control Sym-posium, Paris, 1992. We would like to thank MUn Guofor his research assistanceand Mark Young gratefully acknowledges the financial assistance of the KPMG PeatManuick Faculty Fellowship Program.
266 Journal of Management Accounting Research, Fall 1993Research effort to date has tended to focus attention on the more gen-eral question of luhether participation is effective or not. rather than speci-fying the conditions under which It is effective. Conflicting results perme-ate the literature …The main focus of participative budgeting research since Brownell’s[1982a] review, however, has still been on Its consequences, rather thanIts antecedents (see Blrnberg et al. [19901 for a review). The literature re-lating to whether consequences such as performance are affected posi-tively by participation Is still conflicting and Indicates that addressing thereasons for participation may lead to a better understanding of the extantresearch.This paper has two purposes. First, ln the next section, we review theliterature and propose that theories of participation Include both its ante-cedent conditions and consequences. Second, we develop a model of par-ticipative budgeting that uses the information asymmetry between a supe-rior and a subordinate as an antecedent and firm-wide performance as aconsequence variable. Also it is hypothesized that the relationship betweenthese variables is moderated by participative budgeting and budget-basedincentives. Following this discussion, the research method and results ofthe hypothesis testing are presented. The hypothesis tests are based ondata gathered from corporate controllers of Standard and Poors (S&P) 500firms. Finally, directions for future research are discussed, with particularemphasis on identifying three other antecedent conditions of participativebudgeting.LITERATURE REVIEWIn order to structure the review of the accounting literature, a classifi-cation analysis was performed on the 28 empirical studies of participativebudgeting that used either laboratory experimentation or surveys publishedin The Accounting Review. Journal of Accounting Research and Accounting.Organizations and Society from 1970 through 1991. Of the 28 studies, 24examined only the consequences of participation.’ Bruns and Waterhouse[19751 and Seiler and Bartlett 11982] examined (cross-sectional) determi-nants of participative budgeting and only Merchant [1981, 1984] exam-ined both determinants and consequences. A consistent belief rooted inearly participative budgeting studies [Argyris, 1952; Becker and Green.1962] was that participation was used to improve outcomes such as em-ployee morale, motivation, commitment and satisfaction. The inclinationto study consequences Is highly consistent with research on participativedecision making in contexts other than budgeting [Locke and Schweiger.1979).’The 24 studies are Brownell 11981, 1982b.c, 1983a,b. 1985). Brownell and Dunk (19911,Brownell and Hirst [19861, Brownell and Mclnnes I1986I. Chenhall [1986|, Chenhall andBrownell I1988|, Cherrlngton and Cherrlngton [1973], Collins |1978|, Dunk 11989|, Foranand DeCoster (19741, Frucot and Shearon (1991], Kenis 11979). Merchant (1985|. Mia (1988.19891. Milan! (19751. Onsl (1973|, Searfoss [1976( and Tiller (1983(. Field studies wereexcluded because a review by Fenrelra and Merchant (in press] Indicated that no Oeld studieson participative budgeting were published between 1984 and 1992.
shields and Young 267Since survey research methods are used in this paper, a classificationanalysis of the 23 surveys (five of the 28 cited above were laboratory ex-periments) which examined cross-sectional correlations between partici-pative budgeting and its consequences was performed. One survey wasexcluded because the level of disclosure did not permit a classification analy-sis. Two important findings emerged. First, of the 22 remaining studies,many different theoretical frameworks were used to motivate the analysesof the outcomes of participative budgeting (e.g.. contingency, balance, role,leadership style, achievement motivation, locus of control, goal setting,cognitive dissonance, level of aspiration, expectancy, personality and evalu-ation style). Diversity as to theories exists both across studies which usedthe same variables and within a study. Our conjecture is that this diversitystems, in part, from the lack of understanding regarding why participativebudgeting is used in organizations.Second, a count of the number of times that a particular consequencevariable was significant (with an alpha probability of less than 0.05) wasperformed. Overall, seven consequence variables were tested (satisfaction.performance, budget attitude, motivation, job tension, slack and job in-volvement), and there were 24 tests of hypotheses in which the inferentialstatistic was significant in < 0.05). However, there were 35 hypothesis testsin which the inferential statistic was not significant and/or the sign wasnot as predicted.^These two findings are consistent with Brownell’s (1982a. p. 124) ear-lier assessment that “…the literature remains fraught with contradiction,overlap and a general lack of conclusiveness….” This diversity of frame-works can be viewed as both a strength and a weakness. The strength isthat researchers have examined the effects of participative budgeting us-ing a variety of theories and variables. The weakness is that research hasnot produced a coherent or unified explanation for the conditions underwhich participation is beneficial to individuals and organizations. The di-versity also limits the use of statistical meta-analysis (Hunter et al. 1982].The aforementioned results relating to the budgeting context are simi-lar to research In participative decision making in general. Several qualita-tive and statistical meta-analyses of the participative decision making lit-erature also lead to the conclusion that the effects of participation on con-sequence variables are weak (see Locke and Latham [1990. pp. 169-170]).Locke and Schweiger [19791 classified laboratory experiments, field experi-ments and correlational field surveys as providing evidence of a positive,negative or no-difference effect of participative decision making on perfor-mance and satisfaction. The evidence was ambiguous regarding perfor-mance as approximately an equal number of studies found a positive or anegative effect, with the modal study finding no effect. However for satis-faction, 60 percent of the studies found a positive effect, with 30 percentfinding no effect. In another classification study. Leana et al. (19901 foundten studies in which there was a positive relationship between participa-*rhese 59 tests break down as follows: satisfaction (5 significant, 3 not significant),performance (12 signiflcant, 13 not significant), attitude (1 significant. 10 not significant),motivation (3 significant, 7 not signiflcant). Job tension (1 significant, 1 not significant),slack (1 significant, 1 not significant) and job Involvement (1 signiflcant. 0 not significant).
265 Journal of Management Accounting ResearcK Fall 1993tive decision making and performance. 20 studies in which there was norelationship, two studies in which there was a negative relationship, and15 studies in which the relationship was Interactive. Another classificationof studies which examined the participative decision making-satisfactionrelationship also found a great deal of diversity in results with many stud-ies finding a positive association and many others finding either a negativeor no association (Cotton et al.. 19881.Wagner and Gooding (1987bl performed a statistical meta-analysis of70 published studies on participation and its consequences (performance,decision performance, motivation, satisfaction, and acceptance of conse-quences given participation) to reconcile the conflicting meta-analyses ofMiller and Monge (19861 and Wagner and Gooding (1987al. Their mainfindings [p. 524] were that the correlation between participation and itsvarious outcomes is ‘Modest,” and that “many of the noteworthy positivefindings” reported were due to methodological artifacts. Further, they foundthat only a small correlation is due to a direct relationship between partici-pation and consequence variables.Determinants of Participative BudgetingFour streams of research have discussed some antecedent conditionsfor participation. The first stream is based on contingency theory (seeBirnberg et al. (19901). This research has found that contextual variables,such as environmental uncertainty and technology, are correlational ante-cedents of participative budgeting [Birnberg et al. 1990).The second stream stems from the work of Locke and colleagues and isfocused on individual level participation and its motivational consequences(e.g.. motivation, commitment, performance, satisfaction) [Locke andSchweiger, 1979; Leana et al., 1990]. Locke proposes that the benefits ofparticipative decision making are work motivation and/or cognitive un-derstanding. The cognitive perspective has not been pursued nearly as muchas the motivational perspective; however, this direction for research is gain-ing momentum as Locke et al. [1981. p. 139] state that,… the single most successful field experiment on participation to datestressed the cognitive benefits: participation was used to get good Ideasfrom workers as to how to Improve performance efficiency.Recently, some participative decision making research has either testedhypotheses based on the cognitive perspective or tested the relative strengthof motivational and cognitive explanations [Locke and Latham. 1990, pp.170-1].The third stream of research stems from the Japanese managementliterature. Many Japanese firms employ concepts such as participativedecision making and quality circles with the goal of obtaining accurateinfomiation about local conditions in the various parts of a firm [Ouchi,1979; Young. 19921. This information is used to improve firm-wide perfor-mance directly through more efficient resource allocation. Whfie motiva-tional consequences like improved morale and job satisfaction may occur,they are not the primary reason for participation in Japanese firms.Finally, ln contrast to many of the behavioral studies, agency theoristshave analytically modeled how differences in information between a supe-rior and a subordinate, or information asymmetries, affect the demand for
Shields and Young 269participative budgeting In organizations IMagee. 1980; Chrlstensen. 1982;Balman and Evans. 1983;Penno. 1984, 1990; Kirby etal.. 19911. The agencyview is that participation Is used by a superior to learn about the localenvironment so that decisions such as resource allocation can be improvedand optimal Incentive contracts designed for subordinates.^HypothesesAgency theorists ai-gue that the demand for participative budgetingarises because various parties engaged In the budgeting process possessdifferential information about uncertainty (e.g.. central and local manage-ment) [Magee. 1980; Baiman. 1982; Christensen, 1982; Baiman and EVans.1983; Penno. 1984. 1990; Klrby et al.. 19911. Except for a few studies (e.g.Pope [19841 and Young [19851) the behavioral literature has not exploitedthis explanation for participative budgeting.”* Instead, when there has beenan explicit focus on antecedents, the behavioral literature usually discussesabsolute levels of uncertainty (present or absent as in Young [1985]) butnot differences in levels of uncertainty. The agency perspective assumesthat a signiflcant reason for the existence of participation is the transfer ofInformation from a subordinate to a superior and that there are potentialgains for both parties (e.g.. better information, resource allocation, incen-tive plans, performance, compensation).Information asymmetry generally would be most severe in flrms whichare extremely large, and geographically dispersed with diverse productsand technologies. In these firms, central management does not know rela-tively more about local conditions than do local managers. Thus, centralmanagement can use participative budgeting to leam about local environ-ments as well as to provide motivation. This allows central management tobetter allocate resources to operating units and to offer operating manag-ers better incentive contracts. In general, as the difference in informationIncreases, there is more potential gain from participation. This argumentis summarized in the first hypothesis.^As an example of how an understanding of antecedents can affect particular consequencesof participation the following example is offered. Consider a situation in which a researcheris trying to understand the effect that partieifjation is having on lower level managers. Manystudies have assumed that senior management uses participative budgeting to increase jobsatisfaction. However, in some situations senior management might decide to use participationto obtain a subordinate manager’s private Information, rather than attempting to Increasehis or her job satisfaction. In this situation, participation might consist of a meeting inwhich the superior aggressively attempts to obtain the manager’s Information. A researchersurveying the firm In an attempt to determine whether participation Increased job satisfactionwould probably find few positive results. Contrast this with a situation In which a superiortruly desires to inerease job satisfaction and performance by allowing subordinates theopportunity for participation involving Joint decision-making |Locke and Schweiger, 19791.Structuring research (especially survey studies) on participative budgeting by includingquestions relating to why subordinate managers think participation is used and theantecedent conditions that are currently in place could provide more consistency for theresults in the literature.^However, behavioral research has empirically examined the association between Informationasymmetry and information misrepresentation. Young [19851 examined how the effect ofInformation asymmetry on slack creation was moderated by felt social pressure not tomisrepresent performance capability. Jaworski and Young [19921 examined how the effectof Information asymmetry on information misrepresentation was moderated by Job tensionand jjerson role conflict.
270 JoamaX of Management Accounting Research, Fall 1993HI: There is a positive association between the extent of Information asym-metry and the use of participative budgeting.Central management uses local Information gained from participativebudgeting for at least two purposes. First, the Information is used to Im-prove the ex ante efficiency of resource allocation among the operatingunits and, hence, expected firm-wide performance. Second, this informa-tion can be used to design more effective incentive systems that can beused to increase motivation. It Is conjectured that when participative bud-geting is used more extensively, management makes greater use of Incen-tives that reward performance based on meeting or exceeding the budget.Such Incentives are known as budget-based schemes (Demski and Feltham.1978: Balman, 1982: Chow. 1983].H2: There is a positive association between the use of participative bud-geting and the use of budget-based Incentives.Since subordinates can use local Information to their personal advan-tage, some agency models use budget-based incentives to encourage sub-ordinates to use their private Information to increase the level of goal con-gruent behavior IDemski and Feltham. 19781. When an information asym-metry exists between local and central management, in addition to usingparticipative budgeting, central management also uses budget-based in-centives. Since senior management Is unaware of how a manager mightuse his or her information, budget-based Incentives are employed to moti-vate managers to use the information to improve performance.H3: There is a positive association between the extent of Information asym-metry and the use of budget-based incentives.A critical question being asked in this research is, does the firm gainfrom the use of participative budgeting? One positive outcome relates toimprovements in firm-wide performance. Hopwood 11976] argues that thereis not a direct link between participative budgeting and performance. Hisposition is consistent with the empirical results ln several of the studies onparticipative budgeting (e.g.. Brownell (1982b]. Merchant [1984]). One vari-able that may moderate the relationship between participation and perfor-mance Is budget-based incentives. We believe that an important benefitderived from participative budgeting and budget-based incentives is thatexpected firm-wide performance improves as the superior allocates re-sources to subordinates with the best reported opportunity sets and thosewho are motivated to maximize goal congruent performance.Two types of empirical research show a positive relationship betweenbudget-based incentives and performance. Laboratory research by Chow[19831 and Waller and Chow 11985] report that performance increased asthe incentives offered were more budget-based, although controlling for per-formance capability mediated the effect. Murphy’s [1985] econometric analy-sis of executive compensation for the period 1964-1981 using 72 lai:ge U.S.manufacturing firms found a strong positive relationship between executivecompensation and organization performance (retum realized by the commonstockholders). The next hypothesis is consistent with these findings.H4: There is a positive association between the use of budget-based in-centives and firm-wide performance.
Shields and Young 271Figure 1ModelParticipativeBudgeting(X2)Information ^ Budget-based Firm-wideAsymmetry ^~ *” Incentives ^””^ ^ Performance(XI) H3 tX3) ^j|4^ (X4)The four hypotheses ln the model are shown in Figure 1. This model isthe basis for testing the hypotheses. The model expresses the four rela-tionships in the four hypotheses as paths. (P^ J. among the four variables.The model Indicates that in order to reduce the potential for realizing ad-verse effects from information asymmetries, central management uses par-ticipative budgeting (P, g) and budget-based Incentives (Pj 3). ParticipaUvebudgeting also has an effect on budget-based incentives (Pj 3). which inturn affects flrm-wide performance (P34).Research MethodTHE SURVEYThe sample of firms consists of those belonging to the S&P 500. Thesefirms were surveyed as they represent the entire U.S. economy. Corporatecontrollers were selected as Individuals to survey. Controllers were chosenbecause they: (1) play a key role in designing the information and controlsystem of a firm and are thus likely to appreciate the overall picture of thebudgeting system (probably more so than the average manager). (2) havedirect and frequent access to top management to discuss Issues relating tocontrol system design and operation, and (3) provide a perspective on therole of participative budgeting that has been missing from the literature.Thirteen firms were deleted initially from the S&P 500 population be-cause they were either companies which were new or headquartered out-side of the U.S. Of the 487 remaining firms, a total of 98 usable responseswere received. The effective response rate of 20 percent is at the low end ofwhat is considered to be the expected response rate (20-40 percent) formail surveys [Kerllnger, 1986]. The expected response rate was low. in part,because some of the information requested was proprietary (e.g., compen-sation). Because the respondents were guaranteed anonymity, it also wasnot possible to do an additional mailing in order to Increase the samplesize. While acknowledging the relatively low response rate, each samplefirm represents an important business.Another way to evaluate the adequacy of this sample is to compare it tothe samples used in the other survey studies on participative budgeting
272 Journal of Management Accounting Research, Fall 1993which examined antecedents and/or consequences. Inspection of these 23studies published ln The Accounting Review, Journal of Accounting Researchand Accounting. Organizations and Society during the 1970s and 1980sindicates that the unit of analysis ln 22 studies was a manager (typicallyfirst-line). These 23 studies are based on a total of 17 data sets that wereobtained from an average of 14 firms, with questionnaires being sent to anaverage of 120 respondents with the average number of usable responsesbeing 74. In most studies, a convenience sample of firms, typically fairlysmall ln size and located relatively close to the researchers home univer-sity, were used. Given these data, we feel that our sample compares favor-ably with samples used ln prior research.Measurement of VariablesInformation asymmetry, participative budgeting, budget-based Incen-tives and firm-wide performance were each measured by subscales whichwere subsequently aggregated to form an overall measure of each variable.Information asymmetry was measured in relative terms (e.g.. subordinateknows twice as much) as it is difflcult to assess In absolute terms.Since no established measures of lntra-organizational vertical infor-mation asymmetries exist for single respondents, one was developed. Theinformation asymmetry examined was between central management (topmanagement at headquarters) and the investment and profit center man-agers Immediately below central management. As these information asym-metries can occur In relation to Input, process and/or output, a questionwas developed for each. Information asymmetries were directly measuredby asking. “How much more does each manager know relative to centralmanagement about the following Items?” The five items were labor input,materials input, capital input, market for outputs, and technology (trans-formation of Inputs to outputs). The response scales were anchored by (1)”Manager Knows the Same as Central Management” and (7) “Manager Knowsa Lot More than Central Management.”The extent of participative budgeting was measured using five ques-tions adapted from prior research (Brownell. 1982b. 1985: Merchant. 1981;MUanl, 19751. The first three were: (1) “How important is the manager’scontribution to the setting of the budgets?”. (2) “How important Is it thatbudgets Include changes that were suggested by the managers?”, and (3)”How important is it that a budget is not finalized until a manager is satis-fied with it?” These questions were anchored: (1) “E:xtremely Unimportant”and (7) “EMremely Important.” The fourth question. “How infiuentlal doyou feel that the managers are ln setting the budgets?”, was anchored by:(1) “Not at All Influential” and (7) “Extremely Infiuential.” The fifth questionwas “How frequently does central management Initiate budget-related dis-cussions with the managers?”, anchored by: (1) “Extremely Infrequently”and (7) “Extremely Frequently.”Budget-based Incentives were measured by responses to ilve questions.Four of the questions had seven-point response scales: (1) “The compensa-tion system for managers is very clearly specified In terms of how compen-sation is related to budgeted performance.” (2) “Managers’ financial re-wards Increase as actual performance increasingly exceeds budgeted per-formance.” (3) “How Infiuential is the actual performance relative to the
Shields and Young 273budgeted performance of a center In affecting the probability that the man-ager will be promoted?” and (4) “Consider the managers whose last year’sperformance was In the top 25 percent of the managers’ performance Inyour firm. How likely is it that they received larger budget performance-based bonuses than did the managers whose performance was below thetop 25 percent?” The first two questions were anchored by (i) “StronglyDisagree” and (7) “Strongly Agree.”The third question was anchored by (1)”Not at All Influential” and (7) “Extremely Influential.” and the fourth ques-tion by (1) “Extremely Unlikely” and (7) “Extremely Likely.” The fifth ques-tion asked the percentage of managers who received a bonus based ontheir centers’ actual performance relative to budgeted performance.Firm-wide performance was measured through answers to four ques-tions. These were: (1) percentage change In net income. (2) percentagechange in common stock price. (3) percentage change In ROI and (4) asubjective rating of the overall performance of the firm, anchored by (1)”Worst Possible Performance” and (7) “Best Possible Performance.”Path AnalysisPath analysis was used for hypothesis testing. The effectiveness of themethod lies In Its ability to construct a set of statistical (correlational) rela-tionships among a set of variables. In path analysis, the relationships be-tween variables are specified by path coefficients (P^ y) that are Identical tostandardized partial regression coefBcients [Li. 1970; Duncan. 1966). Theresults of the path analysis also provide information on the relative Impor-tance of the independent variables in terms of their effect on the depen-dent variable{s).RESULTSDescriptive StatisticsDescriptive statistics for the four variables are shown in Tables 1 andPearson correlations in Table 2. For budget-based Incentives and firm-wide performance, the descriptive statistics for the scales are based onstandardized Z values because the underlying subscales had heterogeneousscale properties. Thus, these variables’ subscales were standardized andthe standardized values were summed across the subscales. The conver-gent validity of the four variables was assessed using Cronbach’s alpha.All four alphas were greater than 0.60 (Table 1). the lowest value at whicha scale is considered reliable.Tests of HypothesesIn testing the four hypotheses, the expected sign of each correlation orpath coefficient is positive and the expected magnitude is significantly greaterthan zero. In path analysis, the blvariate correlation between any pair of vari-ables can be estimated from the paths leading from common antecedent vari-ables. In our model, only one variable is estimated by more than one variable,budget-based incentives. Xg. Each of the other three paths. P, 3. Pj 3. andP3 4. has only one antecedent variable. The path coefficients are;
274Journal of Management Accounting Research. Fall 1993SCALESubscale’INFX^RMATIONASYMMETRYLaborMaterialCapitalOutputTechnologyPARTICIPATTVEBUDGETING(1) Contribution*(2) Changes(3) Satisfied(4) Influence(5) DiscussionsBUDGET-BASEDINCENTIVES Z(1) Specificity(2) Rewards(3) Influence(4) Performance(5) BonusFIRM WIDEPEPy^RMANCE ZNet IncomeStock PriceROlTotal PerformanceTable 1Descriptive Statistics:Scales9595959595959595959595956868686868687777777777and Subscales23.615.445.363.764.554.5128.436.065.995.665.844.87-0.094.575.074.784.9356.31%-0.0913.4%24.6%6.1%4.7_S_7.261.501.561.771.881.814.791.181.161.451.141.254.691.921.661.322.0744.66%2.6857.50%24.10%5.35%1.38’See Measurement of Variables subsection for descriptions of theresponse scciles.PariidpativeBudgetingBudget BasedIncentivesFirm-WidePerformance• p<0.01••p<0.10Table 2Pearson CorrelationsInformationAsymmetry0.24*0.18**-0.09ParticipativeBudgeting0.37*-0.01Cronbach’sAlpha0.900.830.930.68questions and! Budget-BasedIncentives0.32*
Shields and Young 275HI: Pj 2 = Lia = 0-24. fi < .01:H3: Pi3 = ii^ = 0.18. ]i<.07;andH4: P3.4 = 1:3,4 = 0-32. U < .005.The value for Pg 3 was found by solving equation 1:^H2: P2 3 = £2.3 – (P1.3 * P1.2I = 0-33 (fi < 003) (1)Three of the four values of the path coeflicients (Pjj. P23 and P34) aresigniflcant (E < 0.01) while the fourth (Pj 3) is marginally significant (fi <0.07). These results provide support for all four hypotheses.Post-Hoc AnalysisIn Figure 1. flrm-wide performance is shown as a dependent variable.Two of the other three variables, information asymmetry and participativebudgeting, determine budget-based incentives which In tum are hypoth-esized to detenmlne firm-wide performance. Inspection of the coefficient ofdetermination for path (Pg^) Indicates that only 11 percent (= 0.33^) of thevariation in firm-wide performance Is explained by budget-based Incen-tives, leaving 89 percent of the variance unexplained. While participationhelps determine the extent of budget-based incentives, its indirect effecton firm-wide performance can be calculated from equation 2.P2.4 = P2.3 * P3.4 = (0 33 * 0.32) = 0.11. (2)To determine the indirect effect of Information asymmetry on flrm-wideperformance, a path from information asymmetry to flrm-wide performancecan be determined by using equation 3:Pl.4 = (P..2*P2.3’P3,4) + (P,.3*P3.4) O)= 0.028 + 0.058 = 0.086.From these calculations. It is clear that both Information asymmetry andparticipative budgeting have separate, weak, indirect effects on flrm-wideperformance, neither being significant.DISCUSSIONAlmost all of the extant empirical research on participative budgetinghas focused on testing whether participation affects consequences such asmotivation, satisfaction and performance. Comparative analysis of thesestudies reveals that there is diversity in terms of theories, variables andresults, and thus, no coherent explanation for the consequences of partici-pative budgeting or its antecedents. In this paper, we have argued that inorder for research to make progress towards increasing understanding ofparticipative budgeting, it should focus on explaining its antecedents andthen link that explanation to its consequences.To provide an example of this approach, we developed and tested amodel of participative budgeting which has asymmetrical information as*rhe following multiple regression was used to estimate the variance of P^ 3, which in tumallowed the calculation of the standardized regression coefficient or path coefiicient: Y(XJ =
276 Journal of Management Accounting Research, FaU 1993the antecedent and budget-based Incentives and flrm-wide performanceas the consequences (Figure 1). Analysis of survey data from S&P 500 firmsby path analysis provided evidence which statistically supported each ofthe four hypotheses.^ While the empirical tests provided support for themodel, most of the variance In the use of participative budgeting remainedunexplained. Some of the unexplained variance is due to measurementproblems, but much more of this variance is probably the result of anincomplete model. Further, the questions regarding budget-based incen-tives and firm-wide performance were of a sensitive nature and probablylimited the response rate. The low response rate is an acknowledged limi-tation of the study.The information asymmetry explanation tested in this paper is basedon the assumption that an important source of the demand for participa-tive budgeting is information sharing. Specifically, participative budgetingis used by a superior to learn about the better local information possessedby subordinate managers. The superior can then design a budget-basedincentive system which is conditioned on the information acquired duringthe participative budgeting process. Motivation to perform Is provided bythis incentive system, and firm-wide performance is a direct function ofthe extent of budget-based incentives.While the critical assumptions underpinning this explanation are thatparticipation is used for information sharing and that motivation to ex-pend effort is provided by budget-based incentives, their effects are notnecessarily inconsistent with those tested by the extant research on par-ticipative budgeting’s consequences. The incentive system is intended tomotivate goal, behavioral and risk congruent behavior. The informationasymmetry explanation which Is supported by both theory and data, doesnot provide a complete explanation for the existence of participative bud-geting. Three other sets of antecedent conditions could provide a richerexplanation for the demand for participative budgeting. We have labeledthese as the desire to Improve individual attitudes, behavior and performance,reinforcing a particular culture and providing a mechanismjor organizationallearning .Desire to Affect Individual Attitudes. Behavior and Performance.One reason for initiating participative budgeting Is that it can increasean individual’s morale, commitment, motivation and Job satisfaction. Fur-ther, increases in these variables are thought to improve performance[Becker and Green. 1962; Locke and Schweiger. 19791. However, to testthis effect of participative budgeting requires that measurements of thesevariables be obtained before and after participation. Unfortunately, few. if^The survey evidence presented is subject to the usuaJ potenUal limitations of surveys iBimberget al., 1990). For example, there could be a response or non-response bias. iTie controllerswho responded may be involved with the design and operation of these elements of theirRrm’s management accounting control system, while those who did not respond may nothave been involved and hence felt uncomJortable in providing the Information requested.Another anecdotal explanation, from the corporate controller of a major U.S. firm, isquestionnaire overload. This individual claimed that, since controllers are asked to fill outapproximately three questionnaires a day, they soon beconie selective, lt could be that thosewho responded prioritized ours as a questionnaire in which they were interested.
Shields and Young 277any. studies have reported such pre- and post-treatment effects. Thus,there Is little evidence available about whether participation increases —or otherwise affects — morale, commitment, motivation, satisfaction orperformance.Reinforcing a Particuiar CuitureAnother explanation for the demand for participative budgeting is thatit provides a means to transmit and reinforce a particular organizationalculture. Defining culture as the beliefs, values and goals which distinguishthe members of one organization from another (Hofstede. 1980] provides adirect link between culture and budgeting. Since budgeting is a processused by superiors and subordinates to communicate beliefs (e.g., a subor-dinate informs a superior about the probability distribution of a local un-controllable variable), values (e.g., a superior informs a subordinate aboutpreferences for various actions) and goals, it can be an effective way totransmit and reinforce the intended cultural relations among employees.With this view, participative budgeting could be used when there is a changein the desired culture or the existing culture has deviated from what wasintended. In either case, superiors could use participative budgeting as ameans to alter or to reinforce the current culture.Another way in which culture can create variation in the demand forparticipative budgeting is through its effect on national culture. Hofstede(19801 provides evidence that the level of power distance — the extent towhich a society accepts an unequal vertical distribution of power in orga-nizations — varies by country. Variation in power distance results in dif-ferences in preferences for participation in decision-making. Those in highpower distance countries tend to accept the idea that decisions are madeby leaders and that others implement those decisions. In contrast, in lowpower distance countries, there are more feelings of equality and, thus,everyone should be involved with decision making. The implication is thatnational culture can affect participative budgeting directly. There also canbe an indirect effect through its affects on organizational culture.Providing a Meclianism for Organizationai LearningAnother explanation for the demand for participative budgeting relatesto organizational learning. Organizational learning deals with how a flrm(as opposed to an individual) learns and stores information in organiza-tional memoiy for future use (Fiol and Lyles, 1985: Levitt and Man:h, 19881.^Management accounting procedures can be interpreted as components oforganizational learning. For example, budgeting is a process which organi-zations use to solve problems (e.g.. to learn about better ways to performactivities), to share this information across vertical and horizontal levels,and to serve as an organizational memory for storing information. Thus.participative budgeting can be used by organizations to learn how to solveproblems and to transmit information to improve performance. An illus-tration of using participative budgeting to increase organizational learning^See also the entire February 1991 issue of Organizational Science which is devoted to studieson organizational learning.
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