The Effect of Outcome Uncertainty on Budgetary Slack and Risk Sharing: An Experimental Examination
37 Pages Posted: 19 Aug 2017 Last revised: 10 Feb 2019
Date Written: February 6, 2019
Abstract
While managers commonly possess private information regarding future production cost when developing their cost budget, they also face outcome uncertainty regarding that future cost. This outcome uncertainty, however, has largely been ignored by experimental researchers examining various controls for opportunistic budgetary slack. Social norm theory suggests that managers may view outcome uncertainty as an opportunity to evade an honesty norm and thereby increase budgetary slack. Alternately, the theory suggests that managers may view outcome uncertainty as a cue that they are expected to behave responsibly in their fiduciary role and thereby decrease budgetary slack. We test these competing theoretical effects using a participative budgeting experiment found in the literature. We find evidence that, rather than encouraging opportunism in managerial reporting, outcome uncertainty activates a responsibility norm that reduces budgetary slack. Specifically, we find that outcome uncertainty primes some managers to voluntarily share the risk of higher production cost with their principal, which leads to a decrease in budgetary slack relative to an experimental condition with no outcome uncertainty. This study extends the literature in participative budgeting by examining norm behavior under outcome uncertainty and helps explain the continued use of this organizational control in practice.
Keywords: participative budgeting; outcome uncertainty; budgetary slack; risk sharing
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